Research On Improvement Of China's Banking ERM Under NBCA

According to deeply dramatic changes in international financial environment andnew development of risk management of commercial banks, based on original BaselCapital Accord, the New Basel Capital Accord (NBCA) has been advised to create asupervision framework on capital of commercial banking depending on cooperationof three pillars: requirement of minimum capital, supervision & review, and marketdiscipline and put forward the internal-based rating approach (IRB) which moresensitive to risk compared with standard approach. NBCA innovates a new thought ofenterprise-risk management (ERM) of commercial banking which comprises creditrisk, market risk and operational risk, regarding the IRB as core and credit riskmanagement as key. NBCA has an idea that supervision & review, and marketdiscipline can help to push banks improve their ERM system.NBCA advocates thought of enterprise-risk management of commercial bankingand makes a profound influence on ideas and mode of management and mechanics ofrisk control in commercial banking, and it also put some challenges over china'sbanking, including internal rating system, risk model building, and the ability of riskmanagement, etc.This dissertation firstly research on the total framework of enterprise-riskcomplementary management in china and the transform of economically operationalmode under restriction of risk and capital. The banks should be asked to get thebalance between risks and earning, especially can complement the risk. So the bankshould have the ability to deicide the prices of products and service and put aside lossprovisions to complement expected loss. Beside that, banks should also haveadequacy capital to complement unexpected loss. Many western countries had set updeposit insurance system to enhance the stability of banking system, china need to setup the total framework of enterprise-risk complementary management. At the sametime, china's banks should reform traditional operational mode to build new riskcomplementary mechanism and take in the idea of risk adjusted returning on capital(RAROC). This dissertation has studied the general theory of enterprise-risk management ofcommercial banking and the measurement models of credit,market and operationalrisk under NBCA. This dissertation analyses the objection of credit,market andoperational risk in China's commercial banking compared with internationally activebanks and NBCA.IRB represents the idea of portfolio management of modem credit model thepossibility of default (PD) and the loss given of default (LGD) are the key factors inIRB to calculate the capital of credit risk, if take account portfolio, the factor of loanclustering should be considered. The dissertation utilizes the data of loans available inchina's commercial bank to build the model of default evaluation, analyses theinfluence factors of loss given default, and uses data from capital market and thecopula equation to estimate the relativity of loan portfolio.. This dissertation comparesthe method of credit risk management in China with the modern models of credit riskmanagement and IRB,. The author find that, the method of credit risk management inChina estimates risk lower than fact, the meathod is simplification and moresubjective without scientics, especially has no function of portfolio management.Based on compared result, the dissertation puts forward some advises to improvecredit risk management in China. The dissertation analyses the prerequisite conditionsof single-factor model, homogeneous and normal distribution and testimonies theshortfalls of IRB and other international modern credit risk models.. So china's banksshould avoid the risk of building IRB model and other modern credit models, andshould take actions to testimonies the credit model.In market risk management, this dissertation analyses the characters of market riskfactors in the reform of finance to point the particularity of market risk of banking,in china, to some extent, market risk is deduced by the chandge of financial policydue to the need of adjust the macroeconomics by the central government who has theright to decide and changethe interest rate. The risk of interest rate variation is biggestmarket risk that resulted from the change of basis rate, variation of yield curve andunmatched date of asset and debit. China's banking cant neglect the risk of foreignexchange rate since the reform of pricing of foreign exchange based moremarket-oriented. Other market risk concluding. Option risk and merchtise risk emergemre apparent since market-oriental reform. China's banking should strengthen themanagement of balance sheet of asset and debit, and take more active action toprepare the carryout of internal measurement model (IMM) based on value at risk and other theology estimating market risk.In operational risk management, this dissertation compares the applicabilityand preference of different models, and points out the internal measurement approach(IMA) is the final objection to estimate operational risk, the standard approach is thetransitional choices. This paper also collects loss data of operational risk in china'scommercial bank and analyses the different reasons compared with overseas revises.This dissertation also makes a research on content of supervision and reviewand market diesoline accord to second and third pillar. This dissertation puts forwardthe framework of cooperated development of enterprise-wide risk management withimprovement cooperate governance. Under this framework, the paper studies andadvises how to improve the supervision and information exposure.The main innovation of this dissertation exists following, the author analysisthe new ERM idea of banking expressed by NBCA, learn technology of riskmanagement from the internationally active banks, to deeply diagnosis the riskmanagement facts of china's banking, and put some fact-fitted advises to improve therisk management of china's banking and a series arrangement of ERM building.