The Study Of Credit Concentration Risk On China Banking Industry

One of the key characteristics of the credit supply in Chinese banking industry is the concentration on large obligors, big sectors, important projects and central cities. This characteristic is getting more and more attention both in practice and in academics since the experience from the past banking crises tells us that credit concentration could threat the stability of the banking industry. Although there have been many studies on this issue, most of the studies are qualitative in nature. With the development of risk management techniques and applications of the New Basel Accord, the quantitative study on credit concentration is getting popular.Benefited from my work experience on bank’s risk management, by resorting to both balance sheet and off-balance sheet data of the ICBC, one of the largest and representative banks in China, this paper empirically studies the degree, reasons, risks and management of the credit concentration. Furthermore, this paper develops a credit concentration risk model based on the Merton method, and examines the impacts of credit concentration. The structure of this paper is as follows:Part I examines the current status, especially the risks of the credit concentration. Using the collected credit data, this part calculates the HHI to measure and compare the difference in the degree of the credit concentration across bank types, exposure scales and the number of branches. From2005to2008, on average, the HHI of Chinese banking industry grew up and then decreased to its lowest level. Partly due to the RMB4trillion investment in2009, the HHI of Chinese banking industry increased again, albeit gradually. Small and regional banks have a higher HHI, indicating the more concentrated credit. Based on the HHI and through VEM methodology, this part also tests that the granger causality of the HHI in non-financial enterprises bonds issuance and the real estate investment.Part II explains the credit concentration risk mechanism of Chinese banking industry. The intensive competition in Chinese banking industry leads to perverse practices, such as the vicious competitative cost cutting and the exclusive competition. The resulting competitor following strategy of the lagging banks is the internal reason of credit concentration. Based on the Herd Behaviors theory, this part theoretizes the competitor following strategy into two models the exclusive competition model and the corporation competition model.Part III quantifies credit concentration risk of Chinese banking industry. Based on the Merton theory, this part empirically calculates the asset correlations of13industries of Chinese publicly listed companies; the calculations are then used in Monte-carlo simulation for calculating the changes in capital requirements due to the concentration risks. The results show that the total and sub-industry credit concentration risk capitals need to increase7.3%. Obligor correlations range from22%to30%, with an average of26%which is consistent with the international experience..Part IV suggests credit concentration risk control of Chinese banking industry. Banks should enhance credit concentration risk control. Quantitative results can be used in industry credit policy making and loan RAROC decision, as well as stress testing. Syndicated loan may diversify credit concentration risk among banks. The credit asset securitization may diversify credit concentration risk among whole society. Supervisory administrations should insist the exposure limitation supervision and add new indicators such as one industry or off-balance sheet credit limitation. The Internal Capital Adequacy Assessment Program should be applied to all large banks. According to this paper’s findings,0.3%capital adequacy ratio is the minimum requirement threshold for dealing with the credit concentration risk.