Design, Operational Risk Management System Based On The New Basel Capital Accord, Commercial Banks

According to the New Basel Capital Accord, which released byBasel Committee on banking supervision in June 2004, Operational riskis defined as the risk of loss resulting from inadequate or failed internalprocesses, people and systems or from external events. With thedevelopment of global bank market, the scale of banks kept expanding,the amount of transaction increased rapidly and the complexity of thebank management rose sharply. Operational risk has been more importantin risk management of world banking system. And it has been a trend totake credit risk, market risk and operational risk into consideration as awhole. With more and more concerns were given to operational riskmanagement in international financial institutions, the New Basel CapitalAccord takes the lead in bringing it into risk management framework,putting forward the widely accepted methodology of measuringoperational risk. It asks financial institutions allocating capital fund for it,and make a set of qualitative standards to judge whether an institutionshas qualification to use some kind of measurement methodology. Nowadays, most of Chinese banks are experiencing the transitionperiod to the real commercial banks, with imperfection of internal controlmechanism. Operational risk is one of the main risk resources, and theproportion to the risk of commercial banks is far larger than that ofinternational level. It made the research of measurement and managementof operational risk in China very important. There were not enough concerns given by Chinese banks tooperational risk management. It makes the most Chinese commercialbanks lack in effective methods to evaluate and control the operationalrisk. Effective risk guarding against and management mechanism had notbeen established in most of banks. With the New Basel Capital Accord took the operational risk into thethree pillars, therefore it is a big issue about how to use the experience ofthe international advanced technology for operational risk management toenforce and improve operational risk management in China. There are four chapters in this thesis. The main contents of the first chapter are the general descriptions ofoperational risk. Firstly, the concept of operational risk was given.Compared with the explicit definitions of market risk and credit risk,operational risk covers wider areas. It was not accepted by most of thebanks until the New Basel Capital Accord was signed. Secondly,according to different criterion for division, operational risk was dividedinto various sorts of categories. At last, the thesis analyzes the features ofthe operational risk. In chapter two, the latest main quantitative approaches for theoperational risk in international banks were introduced. And this is thefoundation for the following design and development of the operationalrisk management system as well as one of the main points of the thesis. Itwas considered impossible to quantify operational risk for a long time. Ithas only been a few years to quantify operational risk and allocate capital.The New Basel Capital Accord takes the lead in bringing it into riskmanagement framework, and the measurement methodology foroperational risk were put forward. It asks the financial institutionsallocating capital fund for it. As for the model that was used to measureoperational risk, it was divided into two types of Top-down andBottom-up. This thesis introduces the Basic Indicator Approach andStandardised Approach, which belong to Top-down. For AdvancedMeasurement Approach (AMA), it belongs to Bottom-up, which requireshigh standard of internal data. And only Internal Measurement Approach,Loss Distribution Approach and Extreme Value Theory that belong toBottom-up were introduced. The thesis also analyzes the adaptability ofthose approaches to our financial institutions. According to the author'sopinion, Standardised Approach is a suitable approach for transition, andit should be the short-time direction to quantify operational risk in China. The third chapter discusses the framework of operational riskmanagemen...