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Operational risk assessment of third-party payment platforms: a case study of China

Author

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  • Yinhong Yao

    (Capital University of Economics and Business)

  • Jianping Li

    (University of Chinese Academy of Sciences)

Abstract

Operational risk events have severely impacted the development of third-party payment (TPP) platforms, and have even led to a discussion on the operational risk capital charge settlement by relevant international regulators. However, prior studies have mostly focused on qualitative mechanism analysis, and have rarely examined quantitative risk assessment based on actual operational risk events. Therefore, this study attempts to assess the operational risk on TPP platforms in China by constructing a systematic framework incorporating database construction and risk modeling. First, the operational risk database that covers 202 events between Q1, 2014, and Q2, 2020 is constructed. Then, specific causes are clarified, and the characteristics are analyzed from both the trend and loss severity perspectives. Finally, the piecewise-defined severity distribution based-Loss Distribution Approach (PSD-LDA) with double truncation is utilized to assess the operational risk. Two main conclusions are drawn from the empirical analysis. First, legal risk and external fraud risk are the two main causes of operational risk. Second, the yearly Value at Risk and Expected Shortfall are 724.46 million yuan and 1081.98 million yuan under the 99.9% significance level, respectively. Our results are beneficial for both TPP platform operators and regulators in managing and controlling operational risk.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:fininn:v:8:y:2022:i:1:d:10.1186_s40854-022-00332-x
    DOI: 10.1186/s40854-022-00332-x
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    Cited by:

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    More about this item

    Keywords

    Third-party payment (TPP); Operational risk; Loss distribution approach (LDA); Value at risk (VaR); Expected shortfall (ES);
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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