Credit Risk Management Of Agricultural Bank Of China From The New Perspectives Of Basle II

Financial sector the core of modern economy, and banking is the supporting of financial sector. However, commercial banks are running risks, and are paid attention to in the world. In"the Core Principles for Effective Banking Supervision"issued in Oct. 2006, by Basle committee on Banking Supervision, the risks are divided into six categories: credit risks, national and transferring risks, market risks, interest rate risks, liquidity risks, operational risks, transaction risks, among which, credit risk is the most important one. As studies of financial crisis by World Bank, the usual factor that brings bankruptcy of banks is credit risk. It is also one of the oldest risks in the financial sector. Thus, how to manage and control the credit risk are the important tasks for commercial banks. Yet credit risk is not only dangerous but also bringing lots of innovations for effective management.As the enlarging risks in the world banking, the difference regulation and supervision standards in local countries have made unequal competition in banking business, since 1980s. In June, 1988, the Basle Committee on Banking Supervision issued Capital Accord. However, there are some flaws and advantages of the version, in June, 1999, the Basle Committee released a new one—Basle II. After amended several times in the member countries, it is planning to carry up Basle II in 2006. There are so-called three pillars in the new accord—minimum capital requirement, supervisory review process, and market discipline. Credit risk is also paid attention to by Basle Committee, the new accord discusses this fields including risk-weighting, credit rating, credit maturity, credit concentration, and securetization, etc..The issue of Basle II is directed to internationally active banks, which run for nearly a hundred of year and have advanced experiences in risk management, corporate governance, process management, innovations, etc.. In the field of risk management, they usually have integrated management system. The risk management sector is independently and responsible directly for directorate. They have established comprehensive risk management system, including the relative organization, credit rating system, authorization system, process of risk management, advanced technologies of risk measurements. They even use the concepts of option to manage and measure credit risks. Such advanced methods and technologies bring the risk management from static way to dynamic ways. At the same time, the risk management of Agriculture Bank of China is still at a low level. The former establish good examples for us.The ways of measuring credit risks are divided into two categories: one is traditional, the other is advanced. The former includes the ways of expert, accounting ratios, Z scores; the latter includes the ways of VAR, RAROC model, Credit Metrics, Credit Risk+, KMV model, and Credit Portfolio View.Besides the advanced measurement, the international banks also use many financial derivatives to manage credit risks, such as credit swap, credit option, and credit forward contract. However, we also should know such means only can transfer risks, but cannot completely delete risks.Agricultural Bank of China is one of the biggest banks—Big Four-- in China, and it was built in 1979. The other three have finished the corporate reform and successfully been listed in the stock market. The reform of Agriculture Bank of China is still lagged comparing to the other three and it is faced a harder pressure bother from internal and external. Thus, this paper studies the reform of Agriculture Bank of China, the issues including, how to resolve the non-performing problems, how to increase the risk management level, and to improve the credit quality, and how to reach the capital requirement of capital accord, and how to go to the public.This paper studies the reasons and current situations of credit risks in Agriculture Bank of China, using the principles and ways of institutional economics, information economics, and industrial economics. The paper puts forwards credit risks of this bank can be contributed to government intervention, flaws in bank governance, and disadvantages in risk management, adverse selection and moral hazards. The author holds that government intervention is still the serous problem in this bank: at the end of 2006, the specialized loans intervened by government accounted for 414 billion RMB, among which non-performing accounted for 349 billion RMB that is 47.2% of the total non-performing loans. This paper also discusses the implication of corporate governance and analyzes the links between the governance and credit risks. In this analysis, the author disclosed another reason that brings credit risks in Agricultural Bank of China. The author also uses the asymmetry theory to analyze the problems of adverse selection and moral hazards in Agricultural Bank of China.It is necessary for Agricultural Bank of China carry up a new risk management system to control and regulate risks. This paper puts forwards the path to improve the risk management: peeling off non-performing loans, restructuring its financial structure, diversifying shares, clearing property rights, improving corporate governance, establish incentive-restrained mechanism, increasing risk management.Finally, this paper holds the authority of financial supervision and regulation is also important besides the bank itself. Then, the relative improvements of financial supervision and regulation are also very important.