A Research On The Credit Risk Measurement Of Commercial Banks With KMV Model

Credit risk is one of the major risks commercial banks face. In China, the issue of credit risk is even more serious. How to improve credit risk management has become the most urgent issue facing commercial banks. China's commercial banks lack the ability to manage credit risk quantitatively, and they seldom use models in dealing with credit risk. This paper endeavor to study the KMV model application in our commercial banks.On the base of the particularity of China's stock market, selecting the parameters of the KMV model and using the data from one commercial bank, we adopt non-performing loans (NPLs) ratio to substitute expect default frequency (EDF) to fit the function between NPLs ratio and distance to default (DD). Finally, put forward several proposals on how to enhance commercial banks' credit risk management ability.The paper consists of six sections:The first part is introduction. Explained the background and significance of the topic, what work has been done about it and the main content of this paper. The second part introduced the management of the credit risk. The third part inspected the current situation of credit risk management in our commercial banks, and analyzed the applicability of modern credit risk management models in China. The major purpose this part is that the KMV model is the most suitable model that can be used in China. The fourth part modified the KMV model on the base of the particularity of China's stock market and the finical situations of listed companies. The fifth part adopted non-performing loans (NPLs) ratio to substitute expect default frequency (EDF) to fit the function between NPLs ratio and distance to default (DD).The sixth part put forward some proposals from the aspects of improving institutions, completing the database, internal as well as external credit rating, and developing models on how to raise the level of credit risk management in our commercial banks.