| Credit rating is the basis of risk measurement of credit capital by commercial banks. The Internal Ratings-Based Approach, or IRB is a method used by the bank's risk assessment specialist, through the use of certain rating method, to give a comprehensive evaluation to the borrowers or counterparties in the aspects of ability and willingness if they can pay back on time and in full related to the contract, and by using simple credit risk rating symbols to show the relative risk size. IRB is the core of the New Basel Capital Accord, which is a set of measurements of calculating the bank's capital adequacy ratio and monitoring of the capital based on its internal risk rating. It represents a major trend in the development of risk management technology.The New Basel Capital Accord has been gradually implemented in its member states since 2006. Within the new Accord, the IRB (The Internal Ratings-Based Approach, or IRB) has the most far-reaching impact, which represents the major trends in risk management. Some Western bankers believe that the implementation of the IRB can accurately reflect a bank's capital requirements and increase its capital adequacy ratios, and at the same time enjoy the capital discount offered by the Bank for International Settlements. More importantly, the New Basel Capital Accord puts great emphasis on control of credit risk, switching from previous simple approach of only focusing on capital adequacy to highlighting bank risk management from the minimum capital requirements, supervisory oversight and market discipline inspection with all three bound together to form a supervisory framework, therefore establishing a more precise, more comprehensive, more sensitive risk assessment system. It will help the banks improve overall risk management, and enhance their ability of risk pre-warning and control, so that regulatory capital and economic capital are in line, thus ensuring long-term stability of the banking sector development.For China's commercial banks, credit risk management is the current key point and still will be for quite a long period from now. It is currently an urgent issue and need in-depth study in the field of how to balance China's national conditions, especially the conditions of China's commercial banks with those of advanced countries, to establish a strict scientific credit risk prevention system to effectively control operating risks by selectively using the IRB approach in the new Basel Capital Accord. Based on latest requirement of the New Basel Capital Accord, This paper gives a comprehensive description of the contents and core technology of the internal rating based approach. It also covers the options and strategies in specific application of this approach using a case study of a steel company. Finally, it explores the advantages of using IRB in our commercial bank system for bank credit risk management according to China's commercial banking industry's own characteristics. It offers several strategic approaches including accelerating the construction of basic database bank, establishment of the risk rating model with Chinese characteristics, and establishment of a professional team specializing in risk rating and making full use of the guiding role of the supervisory authorities. It has a very important practical value in promoting the implementation of internal rating China's commercial banks. |
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