Credit Risk Research For Commercial Bank

This paper describes the credit risk by financial engineering theories and applies this viewpoint to assess the bank's credit risk management framework.Credit rate of return is the credit internal rate of return you get that makes the net present value of this credit activity zero. The credit rate of return is a random variable as a result of any bank's credit activity.The Credit rate of return has its own probability distribution. We define the standard deviation of the probability distribution as the credit risk. The relationship between the credit rate of return and the credit risk obeys the law of CAPM model.The credit risk control bases on such theories: (1)Bayes' formulation theory for a single credit activity, and (2) Harry Markowitz's investment portfolio theory for a credit portfolio.The probability distribution of a credit rate of return depends on the environment of the credit activity. With the control of the environment, we control the credit risk.This paper gives its own assessment to the present bank credit risk management framework by its own viewpoint.The 5-level classification for credit is based on credit risk. This paper thinks that this classification for credit is wrong because it ignores the credit rate of return that relates to the credit risk. The classification for credit must be based on the relationship between the credit return and the credit risk.The framework for the present bank's credit risk management is not comprehensive because it only controls the risk that comes from the companies. The credit risk also comes from the economic environment and the bank itself. We must establish a comprehensive framework for the bank's credit risk management.