Credit Risk Management Of The Commercial Bank

In the key principle of effective supervision on bank in 1997, The Supervisal Committee of the Bank of Basel sums up main risks of the bank from eight respects, which are credit risk, the country and transfer risk, market risk, interest rate risk, liquidity risk, operation risk, legal risk and reputation risk. The credit risk occupies the special position, the study of the World Bank shows that the credit risk is the most common reason of bankruptcy to the bank. So, managing and controling credit risk is the most important content of the commercial bank. The credit risk not only brings potential loss, but also encourages the commercial bank carrying on the positive reforms. This monograph investigates the cause of credit risk of the commercial bank from the theory of asymmetrical information and market structure. Due to asymmetrical information, the limited rational commercial bank carrying on the behavior of credit can not avoid the problem of adverse selection and moral risk, which causes the phenomenon of Bad Money Driving out Good Money in the credit market leading to credit risk of the commercial bank. From the theory of market structure, compared with the monopoly market structure, the competitive market structure of bank is more favorable to reduce loan interest rate. Lower loan interest rate enlarges the scale of investment and decreases the bankrupt probability of enterprise, which reduces the credit risk of the commercial bank. However, the monopoly market structure of the bank improves loan interest rate, which reduces the scale of investment, increases the bankrupt probability of enterprise, leads to higher credit risk. In order to manage credit risk effectively, it is necessary to measure the credit risk. There are the ways of classical and modern credit risk measurement to measure the credit risk. The way of classical credit risk measurement includes the expert's system law, Z score model and ZETA Credit Risk Model. The modern credit risk measurement includes Credit Metrics Model of J.P.Morgan, Credit Risk+ Model of CSFP, Credit Monitor Model of KMV company, Credit Portfolio View Model of Mckinsey company. The development of credit risk measurement also causes the attention of supervisal authorties, the Agreement of Basel and the New Capital Agreement of Basel also propose the way of credit risk measurement. How to regulate the rational price to loan is an important content to the risk management of the commercial bank. This monograph introduces the main rating organizations in the world, with the help of their research, the author check the credit grade of the debtor and discuss the problem of loan pricing. Due to the interest rate being regulated and the commercial bank having no right of pricing, the credit risk of the commercial bank of our country is very high. To solve the problem of the serious credit risk of the commercial bank, it is necessary to put forward to marketization of interest rate. Managing and controlling the credit risk, it is also important to strength the inner construction of the commercial bank. The domestic and international research shows that the level of managing credit risk of the commercial bank is highly positive correlation with the inner construction of the commercial bank. The problem of inner construction is highly appreciated by the commercial bank and the supervisal authorties from the financial crisis of 1990s. With the development of financial innovation, the commercial bank is also applying financial innovation to manage the credit risk. As an important result of financial innovation, the credit swap, credit option, credit forward and credit-linked notes are applied to manage the credit risk. The credit derivatives can transform the credit risk, but could not eliminate the credit risk, and the credit risk of credit derivatives also causes the commercial bank highly attention. Besides with the commercial bank, the supervisal authorties has also the responsibility to manage and control the credit risk. With the development of financial innovation, the supervisal authorties of finance is also changing timely to manage the credit risk.