Research On Application Of Internal Ratings-Based (IRB) Approach In Credit Risk Management In Commercial Banks Of China

With the fluctuations in the value of loan collateral, as well as development of Financial derivatives, credit risk has become the major risk that banking industry faces in the world. According to China's actual situation, credit risk as well as the huge non-performing loans arising from it has become a big problem that constrains the development of China's banking industry.The New Basel Capital Accord was published in 2004 June, which clarifies Internal Ratings-based approaches as credit risk analysis tool and technical platform. Since then, Bank Internal Rating system has been playing a significant role in a bank's risk management system. Several theories are involved in the development of Internal Ratings-based Approaches. Most international banks have put the theories into practice and now they have formed systematic operation mode. To keep up with international step, China's incumbent commercial banks are actively constructing their own internal rating system in a way to fully exert their advantages. However, China's medium-/small-scale commercial banks are encountering many difficulties in the process of building their own internal rating-based systems. As far as we know, internal rating-based system becomes inevitable for a bank to cater for intensive international competition. Meanwhile, it also gives an opportunity for China's commercial banks to carry out comprehensive risk management system and strive for leap-forward development.At present, the main difficulties are that rating management cannot come into a system and cannot have a balanced development, which is hard for internal risk rating to further credit risk management. Comparing to foreign banks, they have perfect internal risk rating system that we can use for reference.This thesis intents to outline internal risk-rating framework for our banks. It utilizes advanced experience of foreign banks, and brings forward suggestions on how to develop and use our risk rating both in theory and in practice by use of agricultural bank of China in Jangsu province. Specifically, this thesis has six sections. Section one is introduction, which show the source of the subject of the selected title and selected title background. Section two is literature reviewing about credit risk models and the development of the Credit risk measurement techniques. The third section introduces and analyzes the theory of internal rating system from the aspects of concept, basic elements, key indices, analysis method and technical requirements. The forth section analyzes the credit management of China's and foreign countries' Banking, then according to China's statue, finds that those updated models cannot be used at present. Section five first clarifies that we can now use Z-score model instead of those updated models, then has an empirical analysis between Z-score risk rating and internal rating in agricultural bank of China in Jangsu province. Based on section four and five, section six concludes limitation of home commercial banks, binging forward suggestions on how to construct internal risk rating.