A Study of Operational Risk in the New Basel Capital Accord - A case of K Bank
Shin-Hsiung Chuang · 2006
In order to cope with the operational risk resulting from drastic changes of financial market and diversified financial products (e.g. product design, training for sales personnel, risk management, etc.), Basel Committee on Banking Supervisioni¼BCBSi¼decided that, under the minimum capital requirement, the banking groups are requested to increase the operational risk capital requirement, which will be implemented in the banking business by the end of 2006. The operational risk, defined by Basel Committee on Banking Supervisioni¼BCBSi¼is âthe risk of loss resulting from inadequate or failed internal processes, people and systems or from external eventsâ. Although the scope of the operational risk has been narrowed down, the definition is still ambiguous to the banking groups. The operational risk needs to be clearly distinguished from the credit risk and the market risk such that categorization and quantification of the banking business can be realized. In fact, besides the natural disasters and irresistible causes, most of operational risk results from the failure of internal control and policy execution rather than from causes of systemic risks. Therefore, it is inappropriate to apply the same risk coefficient to the banking groups without taking their operation quality and scale into consideration. It is also questionable that the capital requirement can entirely offset the financial loss caused by the operational risk. In order to minimize the loss from the operational risk, risk mitigation should be applied. The strategy is to collect the historical data and information to establish a database, which is commonly found in the following four approaches in performing the operational risk capital requirementi¼Basic Indicator Approach i¼BIAi¼, Standardized Approachi¼SAi¼, Alternative Standardized Approachi¼ASAi¼, Advanced Measurement Approachesi¼AMAi¼. Hence, it is inevitable that the banking groups need to invest substantial amount of manpower and capital, which could become a huge burden to the banking groups but is the price to pay to arouse the banking groupsâ attention to reinforce the risk management and evaluation. Establishment of the systems and execution of the policies will not always be impeccable and there will always be room for discussion and modification. Nevertheless, the ultimate goal for the management is to well-operate the banking groups and maximize the shareholders benefit.