A Research For Credit Risk Management Of Commercial Bank In China

Financial security and stability in the operation of commercial banks are the key aspects of economic development in China. The country's financial sector is to be completely opened up in 2006; thus, the commercial banks in China are facing tremendous opportunities as well as challenges. The third plenary session of the sixteenth central committee of the Communist Party of China has set the goal of the country's financial reform which centers on "capital abundance, tight inner-control, safe operation, good services and profits." With this in view, it has become an imperative for the commercial banks to improve their capacity in risk management.Credit risk management is one of the key capacities to ensure commercial banks' survival as well as development. The years following China's accession into the WTO (World Trade Organization) have seen the swarming in of transnational commercial banks. After the complete opening-up of the financial sector of the country in 2006, domestic commercial banks will face even greater external competition which may even threaten their very survival. The transnational banks, with all their operation experience in the western capital market, not only carry with them their rich capital resources and a variety of financial instruments, but also bring along their sound system of credit risk management.On the other hand, China is a developing market economy. The credit risk management system of its commercial banks is developing along with the whole financial and economic reform of the country. With its very short history, the system still contains some old practices of the planned economy. In particular, the existing practices in risk management, inner-control system, external surveillance, and market balancing have put the banks in a disadvantageous position in their competition with the transnational rivals. Therefore, in order to compete in the financial market and to maintain the country's financial security and stability, it is an imperative for the domestic banks to strengthen their credit risk management.Credit risk is vital for China's commercial banks. There exists a considerable gap between China's commercial banks and their counterparts in developed countriesregarding the technology, methods, conceptions as well as the system in credit risk management.This paper believes that, although the commercial banks are confronted with various risks such as credits risks, financial market risks, operational risks, etc, some of them can be resolved through the application of financial instruments, while some others can be prevented by certain rationalized and optimized arrangements in the risk management system. Inspired by the underlying spirit in the relevant documents of the Basle Committee and by the risk management experience of competitive transnational banks, this paper analyzes the credit risk management of China's commercial banks in such aspects as the improvement of technological application in hedging against credit risks and the strengthening of internal control as well as external surveillance.At present, China's commercial banks are confronted with a wide range of dangerously high credit risks while lacking efficient instruments of prevention. This is an obstacle that would hinder the further development of the banks themselves as well as that of the country's economy. Therefore, and in particular, it has become an urgent task for China's commercial banks to counterbalance the risks engendered by the tremendous amount of non-performing loans. The paper submits a range of specific proposals for the improvement of the banks' credit risk management, which should prove to be applicable to both the four state-owned commercial banks and the ten joint-stock ones in identifying, preventing, and resolving credit risks.