On Managing Bank Loan Credit Risk By Financial Derivatives In China

It is a more and more popular and important method for banks to manage loan credit risk by financial derivatives in international financial markets. The credit derivatives market has developed fast with vast trading volume unexpectedly. In China, credit derivatives are still unborn, but they will be developed in the near future with the start of experimental loan securitization under the permission of State Department of China in March 2005. Therefore, discussing and analyzing the financial derivatives and the situation of credit risk in China's banks are significantly meaningful. The main contents are included below.In the first place, the reasons that credit risk of loan is produced and the real situation of loan credit risk of China's banks are indicated. First, loan credit risk is produced because of adverse choice and moral risk under the unsymmetrical information. Second, under the frame of information economics, adverse choice and moral risk happened in the process of loaning is analyzed respectively by the method of mathematics, and also the theoretical approaches to credit risk of loan. Third, on the basis of statistic datum of loan of China's banks, the situation of loan and credit risk of loan are indicated, which includes the decreasing rate of bad debt, the dormant loan credit risk, the improving management of bank loan, and the limited category of management. Four, four elements which are government, bank, enterprise, and non-market are drawn as the reasons of loan credit risk of China's banks, however, the rudimental reason is still unsymmetrical information. Last, several methods solved the credit risk of loan in China's banks nowadays are introduced.In the second place, this thesis raises a new way to manage loan credit risk of China's banks, which is by financial derivatives. Concretely, first, Financial derivative has the characters of information which makes it accepted as sing of market. What's more, it also can control and transfer risks. Therefore, managing credit risk by financial derivatives is advantageous for China's bank, for example, reducing information asymmetry, ameliorating the relationship between bank and company, decreasing the cost of credit risk managing and so on. Second, banks can choose different financial derivatives such as credit option, credit swap, and securitization, each of which has its own mechanism of transferring credit risk. In this thesis, even though only severalderivatives, like default option, credit spread option, total return swap, credit default swap, mortage-backed security, and credit linked note, are introduced, more credit derivatives are utilized in the international financial market. What's more, banks can design credit derivatives according to the structures and characters of their loans. Last, the thesis advises that China's bank should use the appropriate derivatives to manage loan credit risk, price the credit derivatives fairly, and control the risk of financial derivatives themselves like credit risk, liquidity risk and law risk.