| Operational risk is a well-known concept in the field of Finance. The researches on operational risk management has covered all areas in the banking industry. The main focus of this article is the prevention and control of risks in counter business. It aims at evaluating the importance and improving the methods and strategies of counter business risks management in commercial banks of China through a systematic and thorough analysis.The operational risks in the counter business of commercial banks have existed since the beginning of commercial banks, and the risks will exist as long as the counter service of commercial banks exists. The operational risks for counter business have led to a great proportion of the cases and accidents occurred in the commercial banks in China in recent years. China Banking Regulatory Commission (CBRC) has constantly urged that every bank should make efforts in the operational risk management on all kinds of occasions. Both the commercial banks and the regulatory agents have fully realized the importance of the operational risk management in counter business. However, there are still quite a few problems in the counter business operational risks, which cannot be avoided each year.. In addition, same problems recur in spite of constant supervisions. The commercial banks have taken all kinds of measures to prevent and control the operational risks of counter business; however, they still have to face the reality of high cost and low return in this area.Based on the importance of the operational risk management in the counter business of commercial banks, the author believes that it is necessary to conduct research in this area. The ultimate goal is to provide the guidance and apply the theoretical research to the business practice. A research on the operational risk management in commercial banks in China will help to achieve this goal. Therefore, the author conducted research analysis based on operational risk theory and the reality of operational risk management in commercial banks in China. This research essay is divided into four chapters:The first chapter is the theoretical basis of this research. It starts with the definitions of operational risk, listing the definitions by the Basel Committee on Banking Supervision, the Bankers Association of United Kingdom, the Global Association of Risk Professionals, as well as the definition by the China Banking Regulatory Commission. This review reveals that the internal processes, people, systems and external events are the main factors that contribute to the operational risks in commercial banks. Based on the definitions of operational risks, the author defines operational risks in counter business as the operational risks associated with the business at the counter services at the branches of the commercial banks. This also defines the scope of the research in this thesis.Then, through the comparative study of the operational risks in the counter business, the author summarizes its four features as:endogenicity, asymmetry in risks and benefits, diversity and complexity, as well as dispersion. The author also classifies the operational risks in counter business based on the contributing factors and the type of accidents.The second part of this chapter focuses on the formation mechanism of operational risks in counter business. Based on the distribution characteristics of operational risks, the author identifies the diversity of the factors leading to the operational risks in counter business. The author discusses the formation mechanism of the operational risks in counter business in the commercial banks in China. The discussion focuses on the following four aspects:(1) the quality of the management and operations in the commercial banks is affected by the human factor the most; (2) it is most closely associated with the internal controls; (3) there is an increasing tendency to utilize the IT technologies; and (4) it is inevitably under the influence of external factors. The author points out that there must be a healthy and complete risk management system as guarantee in order to prevent and control the operational risks in the counter business in the commercial banks. This point lays out the foundations for the later research on how to prevent and control the operational risks.Chapter 2 focuses on the research on the construction of the operational risk management system. In order to manage the operational risk in counter business, you will need an adequate risk management system for it, which is very poorly implemented in China’s commercial banking sector. This chapter first describes the current status of the operational risk management system in China’s commercial banks, and then compares it with that in the large international banks. It uses a case study of the operational risk management system in a state-owned commercial bank, to demonstrate the gap between the operation risk management schema of our commercial banks under construction and the real professional operation risk management system.Then, this essay discusses the strategy to build the operational risk management systems in counter business of the commercial banks in China based on the existing operational risk management system. It analyzes four issues that need to be resolved in order to build the operational risk management systems in counter business:(1) formation of good culture for counter business operation risk management; (2) establishment of a relatively independent and specialized department for the counter business operational risk management; (3) establishing a professional IT system for the counter business operational risk management, designing models for risk information based on the risk index, and providing data support for the application of the tools for counter business operation risk management; and (4) establishment of an external environment with positive competition. Recommendations are made in five aspects:(1) to establish specialized departments for the counter business operational risk management from up to bottom, and to clearly divide/define the responsibilities so that there will be specialized professionals taking charge of the operational risk; (2) to build a rigorous, integrated and unified culture for counter business operation risk management; (3) to establish an internal control system for counter business, focusing on the process control; (4) to implement a systematic monitoring of counter business operational risks by application of IT technology and scientific management tools, to achieve fast process and accurate control of the operational risk; and (5) to take the counter business operational risks into consideration for capital measurement and distribution, which will provide incentives for the managers of all levels in the commercial banks.Chapter 3 discusses the relationship between the counter business operational risks in commercial banks and internal control self-assessment. To manage the counter business operational risks in commercial banks, accurate identification and assessment of the risks are needed after a clearly defined and effective operational risk management system is in place. We need to understand the object that we need to control, in order to make correct decisions to gain control over it.First of all, this chapter describes the content, principles and methods for the identification and assessment of counter business operational risks.Next, a detailed discussion is conducted on the methods for internal control self-assessment of the operational risks in commercial banks. First, it is pointed out that the operational risk internal control self-assessment means identifying the risks in the business management by all staff members and assessing the magnitude of the risks based on the amount of loss and its probability of happening. In summary, this provides a risk information database, forms a good mechanism to collect risk information, trains a team with advanced risk management culture, and lays out the foundation for a good risk management. Second, it introduces five methods for operational risk internal control self-assessment and their scope for application, as well as the materials used in the self-assessment in the commercial banks in China. Third, it discusses three common mistakes in self-assessment in the commercial banks in China, based on the perspective of practical application. These three common mistakes are:(1) operational risk internal control self-assessment entirely based on historical data; (2) stationary assessment of the operational risk based on past experience; and (3) application of the risk assessment reports from all staff without professional analysis.Chapter 4 discusses the means for the prevention and control of the counter business operational risks on the basis of previous three chapters. After elaborating on the classification of the means for the prevention and control of the counter business operational risks, the author introduces the commonly used means for the prevention and control of the counter business operational risks in the commercial banks in China (System constraints, job restriction, and management authorization, checking post operation, inspection, audition, job rotation and delegated manager system). Then, the author summarizes two models for application of the means for the prevention and control of the counter business operational risk:application with integration and application with differentiation.After describing the basics in the means for the prevention and control of the counter business operational risks, the author summarizes some effective methods for the risk prevention and control based on many years of experience in counter business:(1) For counter business operation risk prevention and control, we should utilize IT technology but not totally depend on it; (2) Our means for risk prevention and control need to adapt to changes in economic development; (3) Our means for risk prevention and control need to be adjusted according to the changes in the key risk indicators; and (4) We need to fully utilize process control to prevent and control the operational risk in counter business.Finally, the author describes the new trend for the prevention and control of operational risk in the commercial banks in China. This includes:transferring some counter business to the backstage and processing in a centralized manner, which can reduce the scope of the risk distribution; breaking down the business process across multiple posts in the front counter and the backstage, which can disperse the counter business operational risk. By reengineering the counter business process, we can achieve the goal of transferring, dispersing and reducing the risk of counter business operational risk. The author believes that this is an important topic, and a major strategy to prevent and control the operational risks in counter business.Through discussions in the above four chapters, the author comes to the following conclusion for the prevention and control of counter business operational risks in the commercial banks of China:The commercial banks of China should set up a department for counter business risk management as the backbone, which is specialized and from top to the bottom, and a framework of the counter business management that is composed of network made up of departments at all levels. We need to dynamically identify and assess the counter business operational risks, using scientific methods. We need to achieve consistent and effective prevention and control of the counter business operational risks, by synthesizing IT technology and means for risk prevention and control, and employing the ideas in process management. |
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