Analysis Of Credit Risk Measurement Models And Study On Their Application In Banking Of China

In modern market economy system, the finance system is a core to the economy system, and banking is an important composition of the system. So, the performance quality and operation efficiency of bank institution is an important sign to the extent of economy development level. However, its development depends on macro-environment, and it will be influenced by migration of the nation economy system, economy policies, law institution, level of economy development, operation performance of enterprises, and so on. Banks are faced with credit risk, market risk and operation risk, but the credit risk is the greatest among them. In view of the importance of credit risk for operation and management in banks, Basel Committee has successively promulgated series of documents on calculating, managing and controlling banks risk included credit risk since year 1988. International large business banks and research institutions had put forward new theories and methods of calculating and managing credit risk and have put them in practice. Because of banking reform lagging economy development in our country, the ability of risk measurement and management in banking is vulnerable. So it is great important for China banking to refer and develop modern risk measurement models and methods. The main contributions are drawn up as follows. Firstly, giving an anatomy and comparative analysis on traditional and modern credit risk measurement models, besides empirical study. By means of much credit data from China banks, the author gives an empirical study on traditional and modern credit risk measurement models, besides an analysis of their applicability for China. Meanwhile, based on the credit data, the paper finds Chinese enterprises'rating migration matrix, mortality ratio table, default possibilities and loss at given default under sorts of rating, which goes ahead of what introduces currently models in China. The study finds that the traditional models have no applicability for China. The forecast outcome of current models is very distinct, and they can't forecast loss of single loan. The forecast of loan loss proportions of the majority models are more than actual proportion of economic capital for China banks'loans (8.24%), which is more than the proportion required by Bale Committee (8%). Moreover, the actual default possibilities of China enterprises are more than what Bale Committee recommends. The study also finds that the enterprises'ratings in China have such drawbacks as weak continuity, big volatility, unstable migration, and high default possibility compared with Moody's and Standard & Poor's ratings. Estimating PD and LGD of bank loans by statistical methods should be firstly sorted by enterprises rating, secondly by industry. Moreover, the study finds that PD and LGD have positive correlation not independence. Secondly, newly-establishing a credit measurement model, with mode and empirical compare with existing models. The mode and empirical study indicates that the weaker solvency enterprises, the easier for moral hazard and credit risk occurring, and they have the same mechanism and critical condition, which is output efficiency. When the output efficiency is over critical condition, the default possibility of enterprises decreases greatly. According to the research, the paper newly-establishes a current risk measurement model based on output efficiency. The new model studys on enterprises'default behavior and loans loss based on their financial structure, and the model not only has representative features, but also can give four parameters, which required by Basel Committee. Mode analysis and empirical comparison analysis demonstrate that the new model is superior to credit risk models that the West developed, and that the new model has good applicability in China. Especially, the new model can calculate not only loss of single loan but also loss of portfolio, and it doesn't require much credit data. Thirdly, putting forward new practical use methods for banks to manage credit risk by credit risk measurement models. The author puts forward new-pricing of loan based on the facts that the pricing method of traditional method (mainly Cost Plus Profit) doesn't calculate loan's unexpected loss and that the method of RAROC underprices the loan, so the author puts forward new method of loan pricing at given profit, which involves loans'unexpected loss and return of economic capital-adjusted. The new pricing method can give a section of loan's prices, which supports for making decision of loans. The new model can give enterprises'simple rating with dumbbell structure. It is necessary to use other information to better rating in practical use. The rating method can give credit line on enterprises, and empirical study displays that the credit line calculated by the model is less than what banks do, because the model involves the loan's loss and the rating estimated by the model is inferior to actual rating, but it is more practical for banks to control risk.