Credit Derivatives And The Credit Risk Management In China's Banking Industry

The Credit Assets Management is the core problem of China's Banking Industry which is the core of China's financial system. China's banking industry lacks effective credit risk management tools because of the traditional"Issue - Hold"loan-managing mode. It induces the problem of the high bad assets ratio and low capital ratio in China's banking industry. As China opens its financial sector since 2007, China's commercial banks need effective credit risk management tool urgently in order to compete with the international banks.On the international market, Credit Derivatives are invented in middle 1990s and develop at a very fast rate as a new credit risk management tool. Although the credit derivatives market is newly born, it has a promising future. China's banking industry should explore how to introduce credit derivatives to China, learn from the international experience and catch up with the forthgoers.The paper is divided into five chapters. The 1st chapter discusses the modern definition of credit risk and the defects of traditional risk-control tools, highlights the point that China's banking industry needs new tools to increase credit risk management efficiency.The 2nd chapter introduces the new credit risk management tool– Credit Derivatives and its main types as Credit Default Swaps, Total Return Swaps, Credit Spread Options and Credit Linked Notes. It analyses the merits of credit derivatives compared with other tools and the differences among different types of credit derivatives.The 3rd chapter analyses how to use credit derivatives to deal with the problem of bad assets in China's banking industry. Based on the analysis of the reality of China's bad assets, the caused problems, the advantages of using credit derivatives to solve the problems and the blue print of how to use credit derivatives in China, we get the conclusion that credit derivatives are suitable for China's banking industry.The 4th chapter analyses credit derivatives'Capital Relief Effect. It points out that China's banking industry can use credit derivatives to obtain capital relief under the framework of Old Basel Accord, thus increase capital ratio and capital -use efficiency.The 5th Chapter discusses some problems which need attention in China's future development of credit derivatives based on the analysis in previous chapters.In one word, this paper combines the issues of bad assets management and capital management under the framework of commercial bank credit risk management, points out that credit derivatives are the suitable tool to solve the problems that China's banking industry are now facing with. It is a new perspective compared with previous researches.Because credit derivatives are very complex financial tools, this paper can only refer to the application in China and the research range is very limited. Besides, because of the limitation of my knowledge, it is unavoidable that there may be neglects and mistakes in the paper. My dear readers, please don't hesitate to point my fault out if you find some; your help is highly appreciated. Thank you very much.