Research On The Internal Ratings-Based Approach In Commercial Banks Under The Framework Of The New Basel Capital Accords

The first position paper of The New Basel Capital Accords, which was published by the Basel Committee on Banking Supervision in 1996, indicated the naissance of The New Basel Capital Accords. It's based on the ratio of capital, regulatory and market's discipline. The New Basel Capital Accords adjusted the way of capital regulatory to commercial bank, and pointed out in the future the Internal Ratings-Based Approach (IRB) would become the way of quantitative measurement for the commercial bank's risk. The Basel Committee on Banking Supervision also asked supervision department to help commercial banks set up the IRB approach, and encouraged the big international commercial banks to adopt this approach computing the regulatory capital and measuring the bank's quantitative risk. (The committee promised would offer some favor of regulatory capital to those banks.)This paper conducts a thorough research both theoretically and empirically on the IRB approach of commercial bank under the frame of the new Basel capital accords. The main work and conclusion of this paper are as follows:1.Introduces the background and significance of this research, reviews the main achievements of the commercial bank's IRB approach in recent, and points out the problems that needed to be solved. From the born of The New Basel Capital Accords, how to use the IRB approach to quantify credit risk always was an important research problem, which is faced by all commercial banks. However, there were still many questions, which the content of this paper is determined.2.Analyzes the capital's supervision ways of The New Basel Capital Accords (the new Basel) and the effects to bank's capital. The new Basel still considers the ratio of capital as the core of capital supervision, which inherits the old Basel's supervision idea, but improves the way of computing of the ratio of capital. The new Basel asks the banks to take the IRB approach as the quantitative measurement for the credit's risk, which includes the basic internal ratings-based approach and the advanced internal ratings-based approach. And due to the new Basel's introduction, the effect to the commercial bank is very in evidence: the big international banks can use the IRB approach to quantify the regulatory capital, which leads to their regulatory capital sharply reduced. But for the middle or small banks, because of losing the ability of adopting the IRB approach, can not reduce their regulatory capital, which leads them to be in adverse circumstances on the competition for the big banks. Moreover, the regulatory capital of the commercial bank increases with the probability of default, the loss of given default and the correlative coefficient of assets, and then the real capital of the commercial bank further lies on the regulatory capital, the economic capital lies on the capital cost, the probability of default and the loss of given default.3.Analyzes the base frame and model of the IRB approach. First introduces the quantitative measurement of the new Basel's regulatory capital, and then researches the base frame and model of the IRB approach and points out its lack. According to the prescription of the new Basel, the regulatory capital of commercial bank mostly lies on the following factors: the probability of default, the loss of given default, exposure on default and effective maturity. The research of this paper indicates that due to the limitation of hypotheses of the model, such as normal distribution, homogeneity, etc, using the internal model to estimate the commercial bank's credit risk would maybe lead to very significant bias error. And points out that the way of copula function and tail dependence coefficient can solve this problem, by which can exactly depict the tail characteristic of the credit risk.4.Deeply researches the setting of the IRB approach, and Analyzes the effects to the commercial bank. First introduces the based requirements for the loan's partitions of the new Basel, points out the different ways of the loan's partition have the very significant effects for the loss of loan. So the banks may adopt the more meticulous way of the loan's partition to correctly identify and quantify the risk, reduce the regulatory capital. And then aiming to these problems, this paper researches this point and presents advice for the IRB approach's setting of our country commercial banks. 5.Researches the problem of using credit transition matrix to estimate the rate of default of the commercial bank. Firstly, researches the problem of estimating the probability of credit transition, including the main way of the estimating the probability of credit transition and how to use external evaluated data to estimate the client's default rate. And then researches how to adjust the credit evaluated date in order to amend abnormity. Importantly, this paper uses the Bayesian computation to overcome the problem of the limitation or small observation set, which is ubiquitous problem in estimating the rate of default for the commercial banks. And combining with the Logit model, this paper adopts MCMC to quantitatively research the problem of estimating bias error of model parameters, which dues to lack of credit observation data. Through this way, the commercial bank can better solve the above problem. Finally quantitatively Analyzes the effects of the economic factors to credit transition probability, and also presents some adjust ways.6.Researches the problem of measuring unexpected loss. Adopting with the advantage of copula function and tail dependence coefficient, researches the problem of measurement the extreme loss respectively. By the quantitative research and numerical analysis, this paper indicates the banks can firstly use non-parametric model compute the tail coefficient of assets, and then adopt proper correlation structure form, such as t-copula, through some simulation compute technology to comparatively correct estimate the loan portfolio credit's loss.7.Researches the problems of estimating the loss of portfolio and the marginal loss of portfolio. Firstly, points that as for the credit risk management of commercial bank, the proper IRB model will be in favor of estimating the economic capital, assets allocation and portfolio management. And then, Analyzes the effects of asset allocation by the different internal rating-based model and regulatory model, and the identical problem of regulatory capital and economic capital. Importantly, combing with the regulatory model, this paper researches how to use IRB model to adjust the loss of risk, which can correct the bias error due to the hypotheses of single factor and normal distribution. This way can correctly estimate the unexpected loss of portfolio and each loan's marginal contribution of credit risk, and help the commercial bank correctly measure and allocation their capital.8.Analyzes the problem of efficiency test for the IRB approach. Firstly, discusses the base rule and frame of efficiency test. And then respectively Analyzes the test problem of the probability of default, the loss of given default, and the exposure on default. Finally, introduces the concrete requirements and ways of pressure test. This paper advises the commercial banks combine the quantitative analysis and qualitative analysis to test the efficiency problem.The primary innovations in this paper are summarized in the following.1.Proves the shortness of the homogeneity hypothesis of IRB approach, which the new Basel asked the commercial banks to adopt. And points the increase of the loan's heterogeneity will enhance the loan's expected loss. If the banks ignore the loan's heterogeneity, they will overestimate the unexpected loss and the economic capital. Moreover, indicates the loan's partition will affect the measurement of the loan's loss by numerical analysis. When the banks do not partition the loan portfolio, the distribution of the loan's loss has the bigger kurtosis and deeper tail. So the way of only considering the index of the loss variation can not commendably reflect the tail characteristic of the loss distribution. Generally speaking, the loan's partition can correctly measure the loan's loss when the coefficient of the loan portfolio is small.2.Introduces the numerical technologies, such as copula function and tail dependence coefficient, into the credit risk management. The new technologies' application presents a new way to solve the problem of estimating bias, which induced by the hypotheses of single factor model, homogeneity and normal distribution, and the problem of lack of observation data in estimating the unexpected loss. The research indicates the banks can firstly use non-parametric model to compute the tail coefficient of assets, and then adopt proper correlation structure form, such as t-copula, through some simulation compute technology to comparatively correct estimate the loan portfolio credit's loss. Comparatively, the form of t-copula has the better flexibility than the other common types of copula. The empirical research indicates the data induced by the copula function will be better than the Riskmetrics model, and compared with VaR, the copula model is better. The work of estimating the tail dependence coefficient is simple, when the sample distribution is known and the observation data is enough, the banks can use the parametric model to estimate the coefficient. But in real world, these conditions always can not satisfy. This paper points out the way of combining with the copula function and the tail dependence coefficient can solve the problem of lack of data.3.Combining with the Logit model, adopts MCMC to quantitatively research the problem of estimating bias error of model parameters, which dues to lack of credit observation data.