Analyses of Operational Risk Measurement Models: Comparative Analysis for Chinese Commercial Banks

Abstract

China has opened its financial market in 1990s. Since then banks have faced increasingly fierce competition. Banks of China have faced complex operational risks and suffered huge losses. Many studies have tried to solve out the causes of these embedded risks. However most previous studies have examined market risks, credit risks, and the types of liquidity. Most of them have focused on the management of banking risks. By combining with the regulation status of the operational risks of China`s commercial banks, we first analyze various methods mentioned in the prior studies. Additionally, we analyzed the operational risks, per se, of commercial banks of China. We find the relatively feasible way to prevent the operational risks. By making contrasts with alternative models of operational risks, we choose the basic indicator approach and the income-based models to test operational risks of commercial banks of China. For five commercial banks of China, income-based model appears to be able to cut the costs of operational risks. In terms of controlling the costs of operational risks, it is the income-based model that seems to outperform than the alternative. Also another aspect to be considered is Chinese commercial banks` capabilities of controlling operational risks. Our regression analyses provides that income based model is at least the best alternative for measuring operational risk in state. Further, the income-based model has its significance in the aspect that the operational risks have greater impact on net income of commercial banks than those of joint-stock banks of China.