Research On Credit Risk Management

Nowadays bankings play a leading role in China's financial system, as the core business, credit line is the major source of commercial bank's revenue, while credit risk becomes the paramount risk confronting commercial banks. But at present stage, firstly China's theoretical research on credit risks stand from the macro prospect, the research on credit risks from micro prospect based on economics & finance theory seems insufficient; on the other hand, China's research on credit risks obviously lags off, quantification methods of credit risks should be intensified and effects of preventing and resolving credit risks also should be improved. Furthermore, overall banking is being confronted with numerous and complicated external operating environment which entails great challenge on risk management institution, technology and effects of China's banking overall opening to the outside world at the end of 2006, which should inevitably push China's banking to be involved in fierce international competitions. So above all, China's banking should take urgent measures to accelerate the reform and innovation of credit risk management, and ceaselessly improve management level, otherwise the surviving, developing and international competence of China's banking should be influenced.Based on risk management theories, this paper is arranged in the logic sequence of rick identification, risk valuation, risk alarm, risk avoidance & resolve and performance appraisal of risk management. And combining with China's financial system reform and commercial banks developing realities, this paper takes systematic and overall research on management of commercial banks'credit risk, which not only includes fundamental theories on commercial credit risk management, but also includes practice exploitation of banking credit risk management. Review on the realities of China's commercial banks'credit risk management and analysis on forming sources of credit risk are included; also theoretical model of credit risk quantification and positive demonstration of creating computation model valuing China's credit risk are introduced; principles & significances of credit risk management are displayed, then specific measures to manage credit risk are delivered from the technological and institutional vision. Finally, this paper casts performance appraisal system of risk management in order to continuously improve credit risk management level.The paper is arranged as following chapters:Chapter 1: Profile. This chapter expatiate research background, purposes, significances, methods and technical routes of commercial banks'credit risk management. It is believed that to a banking-centered country banking risk is the uppermost one of financial hazard, while credit risk is the major behaving format of banking risks. With increasing complicate domestic and international operating of commercial banking and on the background of essential gap existing between China banks'credit risk management and international banking, China's banking should inevitably attack more importance to credit risk management and continuously improve credit risk management level to survive and participate in advanced competitions.Chapter 2: Theoretical realities and remarks of domestic credit risk management. This chapter systematically elaborates domestic and international literatures on credit risk management, and puts forward remarks on above theories and practices to take specific research on China's credit risk management based on current study.Chapter 3: General theoretical analysis of credit risk management. From the micro prospective, this chapter defines the connotation and extension of risk, financial risk and credit risk, and discusses the varieties and characters of credit risk. Then the targets, principles and general methods of credit risk are explained from theoretical sense. Finally, review the evolution of China's banks'credit risk management and confirm that the present situation and problems of China's credit risk management.Chapter 4: Present situation and shaping mechanisms analysis of China's credit risk. This chapter respectively theoretically analyzes the forming mechanisms of credit risk from institutional economics and information economics, on the guidance of which posts the specific formats and characters of credit risk. Then specific forming causes of China's credit risk are discussed respectively from the internal factors such as property rights, corporate governance mechanism, employee level, credit culture, etc. and external factors such as macro economy, governmental intervene, enterprises & financial market reform and law & regulation construction, etc., which lays a foundation to pertinently put forward risk management measures in the following text.Chapter 5: Construction of China's credit risk quantification model. Introduce international evaluating methods of credit risk, and explain the applicable backgrounds of quantitative methods and economics meaning of mathematic model through introducing major quantitative analysis models, then appraisal practice significances of quantitative methods to micro credit risk management. The first section introduces the traditional approach of credit rating (expert institutional approach, Z-score marking model ) and modern approaches (diversified distinguishing models and Logistic regression model), then particularly displays worldwide representational default-quantitating models (e.g. Credit Metrics Model,KMV Model,Credit Portfolio View Model,Credit Risk plus Model). Aiming at China's present situations, the second section takes listed companies as researching specimens and applies diversified distinguishing model and Logistic regression model to demonstrate credit risk confronting China's banking, which takes active exploration of quantitating China's credit risk..Chapter 6: Establishment of dynamic monitoring mechanism of credit risk. From the prospective of monitoring credit capital risk, this chapter advances dynamic monitoring theories and approaches of credit risk. The filtering process before bank's decision-making cannot absolutely ensure that credit assets stand at zero-risk, the nature of decision-making predicates that bank is willing to bear risk and make profit. So it is an important component of credit risk management that establishing credit risk alarming mechanism to recognize and distinguish the risk origins, range, extent and trend ahead of time, which should benefit administrator to take preventive measures coping with potential credit risks, perish them under duding stage and prevent credit assets loss. Firstly, this chapter analyzes credit-after supervision of single debtor and points out that the existence of information asymmetry and moral hazard makes event-after supervision indispensable. But supervision should induce costs, so balancing supervising cost and income becomes the critical technological measure during the process of bank's credit risk management. Then standing from view of banking supervising department, this chapter advances the alarming indexes system of credit risk based on the sufficient consideration of financial and non-financial factors, also applies APH approach to determine the weighing of various indexes and sets up credit risk alarming modeling. Finally, considering uncertainty influences imposed by evolving trends and rules of commercial banks'credit risks, this chapter believes it difficult to precisely forecast the evolving trends, so applies grayness-forecasting theory to build dynamic alarming model of credit risks expecting to increase the sensitivity of credit risk alarming mechanism.Chapter 7: Technological measures of credit risk management. Starting from the technological prospective of risk management, this chapter advances that banks should the following aspects to improve managing level of commercial banks'credit risk as to increase capital adequacy ratio, improve capital pricing level, apply financial instruments to decentralize, hedge and marry against credit risk, accelerate capitalization of credit assets.Chapter 8: Institutional measures of credit risk management (I)——Internal view. Banking system bears the nature of frangibility and negative external effects, rigid and consummate internal control system of credit should be an effective approach to nip bank's credit risks in the bud. This chapter particularly analyzes the specific approaches that commercial banks strengthen internal control construction of credit risk, which acts as the main body of institutional construction in credit risk management. According to the philosophy of New Basel Agreement, this chapter analyzes the existing problems in institutional construction of China's credit internal control from four prospective as control environment, risk appraisal, information and communication, also puts forward relevant counter-measures related with the above aspects.Chapter 9: Institutional measures of credit risk management ( II )——External view. Due to bank's nature of frangibility and diversified formats of credit risks, even though is internal system perfect, it's also difficult to completely control and avoid credit risks, so credit risk management should solely rely on the improvement of management tools and level, also require supervision authority and external market restriction. To apply the spot and non-spot supervision of supervising authorities, information release and voting-on-feet market mechanism should be a beneficial complementation managing banks'credit risks and pushing banks to take overall dimensional control and management. Firstly, this chapter expatiate the necessities of external supervision and supervision contents & approaches, and advances suggestions to improve China's banks'external supervision level from the prospective of institutional innovation, supervision modes, supervision system. Secondly, analyzes the necessities of market restriction to credit risk management, and puts forward counter-measures to optimize market restriction mechanisms as follows: building and consummating information releasing system, setting up exposing deposits insurance system, agency institutions construction, improving credit-avoiding consciousness of benefit-correlating partnersChapter 10: Establishment of performance appraisal system of bank's credit risks management. The specific technology and policy effects of credit risk management should be evaluated by a scientific approach to detect deficiencies, and then further optimizing technological measures and policies should be taken, that is to say, banks should set up technology and policy measures-implementation-appraisal-reoptimization of technology and policy measures to realize the maximizing optimized management. Based on balanced score-marking theory, this chapter respectively analyzes finance, customer, internal business, leaning and innovation dimension, then discusses the performance appraisal index system of credit risk management, finally applies APH approach to determine the weighing of indexes to ensure rationality of appraisal index system. Then author selects eight KPI indexes as crucial criterions.