The Research Of Operational Risk Measurement In China Based On Loss Distribution Approach

Operational risk is one of the main risks that commercial banks faces with, Basel Committee on Banking Supervision defines operational risk, credit risk and market risk as the three risks of banks, and brings operational risk into the risk management framework for minimum regulatory capital requirements. In recent years, more and more cases of operational risk have led to enormous economic and reputation loss for commercial banks. So banks and regulators all over the world pay more attention to operational risk measurement and management. Mea-suring operational risk capital is the first step to prevent and reduce losses for most of commercial banks. The operational risk measurement is still in the exploratory stage now. In the New Basel Capital Accord (Basel Ⅱ Accord), there are three categories of operational risk capital measurement:Basic Indicator Approach (BIA), Standardized Approach (STA) and Advanced Measurement Approach (AMA). And Basel Committee on Banking Supervision encourages internationally active banks to develop their own measurement models of AMA. However, we need to deal with several difficulties while measuring risk capital in our country. The loss database has not established and the measurement models can not applied to all kinds of banks. Lack of standardized operational risk processes also restricts the measurement work.In this paper Ⅰ choose Loss Distribution Approach (LDA) under the Advanced Measurement Approach to measure commercial banks operational risk capital in our country. There are two reasons Ⅰ make the decision. The first one is that AMA is more sensitive to operational risk and needs less risk capital comparing with BIA and STA. The second reason is LDA considers all the loss data and gives more independence to the commercial banks than other AMA models, such as In-ternal Measurement Approach (IMA) and Scorecard Approach (ScA).This paper is divided into the following five chapters:Chapter Ⅰ, introduction. In this chapter Ⅰ discuss China’s commercial banks operational risk measurement research background and significance in detail, and then give a brief summary of current research situation of foreign and domestic in the field of operational risk measurement. Finally Ⅰ analyze the main characteris-tics of operational risk measurement research.Chapter Ⅱ, the characteristics of operational risk and measurement methods. First Ⅰ introduce different definitions of operational risk and list three major finan-cial institutions on operational risk definition including British Bankers’ Associa-tion, the Basel Committee on Banking Supervision and the China Banking Regu-latory Commission. Then Ⅰ make a brief description of operational risks classifica-tion from four perspectives, such as the size of losses, loss frequency, business lines and risk types. Thirdly Ⅰ make an introduction of the risk capital measure-ment methods provided by Basel Committee. Finally Ⅰ make an analysis of the advantages and disadvantages of each method, and select LDA as the method to measure operational risk capital.Chapter Ⅲ, the distribution characteristics of commercial banks operational risk cases in China. This section first describes the standards of selecting opera-tional risk cases including the time, the amount of loss and risk classification, and selects369cases which cover from1994to2012. Then Ⅰ make an analysis of the distribution of commercial banks operational risk cases from two aspects of the time distribution and risk types and briefly discuss the reasons for its distribution.Chapter Ⅳ, the measurement of operational risk capital using loss distribu-tion model. First Ⅰ discuss the basic principles of the loss distribution model, and then list the frequency and intensity distributions of the operational risk loss cases. This chapter concludes with a loss distribution approach for the use of China’s commercial banks operational risk loss data for empirical analysis, and ultimately determines the operational risk capital value based on different confidence level.Chapter Ⅴ, some advice of operational risk prevention. This part first lists some relevant suggestions to promote LDA in the commercial banks of China, and then Ⅰ give several recommendations to prevent operational risk on management.