Measurement Of Operational Risk Capital In Chinese Commercial Banks

Banking operation and management always contains inherent and intrinsic risks, and operational risk is one of the three major risks. The measurement research on operational risk capital has always been a high priority thing of domestic and foreign regulatory authorities. In China, comprehensive provisions on the measurement of required capital for operational risk, which issued by the China Banking Regulatory Commission in 2012, have been laid out in the Regulation Governing Capital of Commercial Banks (Provisional). The small and medium-sized commercial banks in China have a rather weak risk management system. Therefore, exploring the operational risk measuring methods, which conform to the regulatory requirements, have significant theoretical and realistic meaning to small and medium-sized banking companies in China.Operation risk events of bank can be divided into different risk units by business line and event type.From the two dimensions of single-risk unit and multiple-risk unit, this paper aims to propose the measuring methods for operational risk in accordance with the features of operational risk of small and medium-sized commercial banks and demonstrate the effectiveness of them through empirical investigation.First, this paper conducts a study on the capital measurement method of single-risk unit. The past research used to adopt Loss Distribution Approach (LDA) or Extreme Value Theory (EVT) respectively. However, only utilizing single method can not satisfy the dual features-High Frequency Low Impact (HFLI)& Low Frequency High Impact (LFHI) of operational risk. Thus, based on past research, this paper using the Double-truncation Joint Approach-the combination of the LDA and EVT to carry out research on the capital measurement of single-risk unit.Second, this paper analyzes the capital measurement of multiple-risk units. The past research simplified the correlation between multiple-risk units and analyzed aggregate capital of multiple-risk units using the simple summary method, which reduced the accuracy of capital measurement. So this paper utilizing the Copula to measure the correlation among operational risk units.Through empirical analysis of datas from small and medium-sized commercial banks, the results indicate that the Double-truncation Joint Approach have higher accuracy than LDA or EVT, and the correlation among multiple-risk units can accurately calculated by employing the Copula.Based on theoretical discussion and empirical analysis, this paper proposes a suggestion to improve measurement accuracy, explore the effective combination of measurement and management, and designs a step by step implementation path of Advanced Measurement Approach (AMA) according to small and medium-sized commercial banks of different risk management levels.In summary, this paper focuses on the two main topics about the operational risk measurement -the improvement of the measuring methods of single-risk unit and the correlation among multiple-risk units. The study results have diversified the operational risk measuring methods from them simplification, made them multi-dimensional, and meanwhile provided small and medium-sized commercial banks with theoretical evidence, empirical reference and managerial advice to quantify the capital requirement for operational risk.