On Credit Risk & Mitigation For Commercial Banks

This Essay analyses credit risk mitigation measures for modern commercial banks by adopting theories of Information Economics, Comparative Institutional Economic Systems and Risk Quantification. To start with the definitions of commercial banks and credit risk, the Essay concludes why commercial banks should undertake limited risks only. The characteristics of this Essay is that the measurement of expected default frequency focuses on the current market value and dynamic or changing value of entities concerned, rather than stressing on the cash flow and potential profitability of the prospective borrowers as many other risk mitigation methods do. In other words, what unique is that the risk quantification and the measurement of different risks of the same borrower at different times, with the interpretation of credit risk valuation models.The author perceived that the credit risk of Chinese commercial banks is mainly rooted in the economic transition pattern from China planned economy towards a market economy. The fundamental solution to mitigate such risks is to reform Chinese commercial banks?management and operation mechanisms in accordance with modern enterprise operation patterns, and to establish more efficient management supervision and incentive mechanisms. He also pointed out that the development tendency is going through ig banks joint with big banks?and the smaller commercial banks should become he best banks? otherwise Chinese commercial banks can hardly survive after China accession to the World Trade Organization.