Measuring the operational risk of Chinese commercial banks using the semilinear credibility model

Jing Lu, Lei Guo and Xing Liu

Abstract

ABSTRACT

Chinese commercial banks have faced increasingly serious operational risks because of the rapid development of the financial markets and the wide application of information technology. Stringent requirements should be met to address these risks and to ensure reliable operational risk measurement. However, inadequate internal loss data of banks affects the accurate measurement of operational risk. In this study, we improve how the threshold of extreme value theory can be determined and use semilinear credibility theory, a widely employed theory in the non-life-insurance field, to address the problem on operational risk measurement. We combine commercial banks' data on internal operational risk loss and external loss to address the lack of data. We also perform an empirical analysis based on loss data from 1990 to 2011 and identify the operational risk capital of individual banks. The results obtained could serve as valuable references that benefit banking supervision.