Comprehensive Process Control Of Commercial Banks In China

Risk comes together with the existence of commercial banking. Commercial banks utilize customer's deposit and other borrowings as the major source of their operating capital, which is the biggest difference compared to other non-bank industrial and trading companies. The low capital ratio feature has determined commercial banking itself having higher tendency of inherent riskiness. With the continuous development of modern commercial banking, the risk subject and nature experience by banks has become more diversified than before.China is a developing country at its initial stage of market economy and its commercial banking system has not been well developed with relatively weak capability to react to systematic risks. After China's opening its financial market in 2006, local banks are experiencing fiercer competition from foreign banks that may impact severely on their future existence and development if not starting to improve their risk management capabilities from the fundamental level. Among all types of risks that commercial banks are facing now in current situation, credit risk is the most important and dangerous risk. In view of the significant lagging in the risk management concept, technique and methodology held by China's local banks compared to overseas leading banks, the author holds the view to focus on the research and practice of credit risk management under the guidance of Basel Accord II. Despite the guidance of Basel Accord II towards credit risk control, there are still many uncertainties involved in resolving credit risks in reality.The past research on credit risk control is mainly focused on the study of individual factor rather than the comprehensive process control. From the perspective of credit risk control, the major banking risk, under the guidance of Basel Accord II, with the focus on internal control the paper discusses the process control starting from credit pricing.The prerequisite and foundation for the comprehensive process control of banking risks is the quantification criteria of credit risks. Given the experiences of foreign banks and China's ground conditions, the baseline should be set at 8% of capital adequacy and 12.5 % of NPLRatio.It still poses much difficulty in resolving gigantic NPLs through various means like bankruptcy, debt-to-equity and consignment of NPL to asset management corporations or even through combined means of the above. Therefore, capital injection under the guidance of new agreement is an essential measure to strengthen banks' capacity of withstanding credit risks. More importantly, it is also the starting point of the comprehensive process control of credit risks.Regulating corporate governance structure and strengthen the internal control is pivotal to avoid and resolve credit risks of China's commercial banks as much as possible. To establish a credit system in China as well as to strengthen effective regulation and market influence are two major guarantees for the comprehensive process control of credit risks.