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Using BS-PSD-LDA approach to measure operational risk of Chinese commercial banks

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  • Wang, Zongrun
  • Wang, Wuchao
  • Chen, Xiaohong
  • Jin, Yanbo
  • Zhou, Yanju

Abstract

The research of operational risk management among Chinese commercial banks is still in its preliminary stage. Operational risk events are rare and data is hard to collect. This leads to very small data samples. Besides, a large number of empirical researches show that the distributions of operational losses are often skewed with fat tails. To address these issues, this paper puts forward a loss distribution approach (LDA) based on bootstrap sampling and piecewise-defined severity distribution (BS-PSD-LDA). The approach divides data samples into two distinct parts (high-frequency low-severity losses and low-frequency high-severity losses), and fits the two parts by lognormal distribution and Generalized Pareto distribution respectively. Using hand-collected samples of 426 operational losses in Chinese commercial banks during 1994–2010, we estimate the magnitude of operational losses using the BS-PSD-LDA method. We show that our method provides a better fit than the traditional parametric methods. Besides, the method using historical simulation of nonparametric method seems to offer a good fit to the sample as well. However, we believe that the BS-PSD-LDA approach offers improvement from the perspective of satisfying risk control requirement of the regulatory authority and ensuring the efficiency of funds' utilization.

Suggested Citation

  • Wang, Zongrun & Wang, Wuchao & Chen, Xiaohong & Jin, Yanbo & Zhou, Yanju, 2012. "Using BS-PSD-LDA approach to measure operational risk of Chinese commercial banks," Economic Modelling, Elsevier, vol. 29(6), pages 2095-2103.
    • Handle: RePEc:eee:ecmode:v:29:y:2012:i:6:p:2095-2103
    DOI: 10.1016/j.econmod.2012.06.031
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    References listed on IDEAS

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    Cited by:

    1. Xiaoqian Zhu & Jianping Li & Dengsheng Wu, 2019. "Should the Advanced Measurement Approach for Operational Risk be Discarded? Evidence from the Chinese Banking Industry," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(01), pages 1-15, March.
    2. Yinhong Yao & Jianping Li, 2022. "Operational risk assessment of third-party payment platforms: a case study of China," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 8(1), pages 1-20, December.
    3. Xu, Chi & Zheng, Chunling & Wang, Donghua & Ji, Jingru & Wang, Nuan, 2019. "Double correlation model for operational risk: Evidence from Chinese commercial banks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 516(C), pages 327-339.

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