The Application Of Stress Testing In The Risk Management Of The Commercial Bank In China

The financial market is developing fast under the motivation of market economy. The financial supervisors of each nation enhance the important of the financial risk management. The stress testing as an important risk management tool is used by some nation, however, for the high cost, the effect is relatively small. After the financial crisis, the economy development of each nation is suspended, many huge financial institutions gone bankrupt. By the influence of the financial crisis, the supervisors of each government paid attention to the stress testing. Moreover, American and Europe started to put stress testing into practice on banks in 2009. The China Banking Regulatory Commission (CBRC) obeys the requirement.of Final Sector Assessment Program (FSAP), and starts the stress testing on the state-owned banks in 2003. However, the stress testing is not applied widely for the lacking of standard system. The situation is not changed until of 2007, the CBRC publishes the standard and asks all the banks in China must obey it. Hence, the stress testing is applied in our country which promotes the research of the stress testing extensively.This paper establishes the theory system of stress testing on the base of relative mature result by the foreign researchers. It establishes the credit risk, market risk, and liquidity risk and operation risk stress testing models for the commercial banks in China. This paper also analyzes the demonstration of the risk which banks will encounter based on the proposed models. The result reveals the risk situation of some banks; moreover, it can be a valuable reference for the risk mangers.There are five chapters in the paper:The Chapter 1 gives a brief review of stress testing and introduces the practice situation in some countries. The stress testing researching starts in the mid 1990s. After that, the stress testing is studied extensively which contains the relationship between stress testing and Value at Risk (VaR), the methods of stress testing analysis and the empirical work of stress testing on the bank system. The stress testing analysis is relative immature in China. Under the promotion of FSAP, several developed countries applied the stress testing in the financial risk manage system, and take into practice in the economy institution. The China starts the stress testing in the end of 2007.In Chapter 2, it derives out the basement of the stress testing theory. It introduces the definition of stress testing which includes the definition of stress testing, the purpose of stress testing, the significance of stress testing and the field of application. In section 2 of Chapter 2, it discusses the importance of stress testing. The Basel commission requires the stress testing should be under supervised. For the defects of the VaR, the stress testing becomes the necessary tool for the economy risk management. The section 3 analyzes the feasibility of stress testing. In section 4, it introduces the stress testing steps and methods. It classifies the stress testing into 4 kinds, and gives out an introduction for each kind in section 5.In Chapter 3, it analyzes the methods of the stress testing into the risk management of banks in China which is based on the stress testing theory. Moreover, according to the risk types, it builds the stress testing models which include commercial banks'credit risk, market risk, liquidity risk and operation risk. Stress testing of commercial banks credit risk is built on the base of Credit Portfolio View (CPV) which uses the Logistics model. The discussion of stress testing on commercial banks is based on three parts:interest rate risk, exchange rate risk, and stock price risk. The interest risk and the exchange risk are based on the sensibility analysis; whereas the stock price risk is build on the VaR model and Mentor Carlo method. The stress testing on the liquidity risk of commercial bank is supposed that the net capital flows obey the mix normal distribution. The stress testing on the operation risk uses the Extreme Value Theory.Chapter 4 applies the stress testing into the demonstration of the commercial banks in China. This chapter is based on the stress testing models which are built in chapter 3. The demonstration considers the macro economy factors and applies them into the model. It uses the method of the recurrence estimation and selects out the significant impact to the probability default factors; moreover, it ensures the situation which the banks are on the stress. The result shows that the Agriculture Bank of China face the smallest interest risk, whereas the China Contribution Back with the largest interest risk, and the Industrial and Commercial bank of China with the largest exchange risk. The stock price testing shows that: under the little stress testing to resist the stock price risk, it should reserved 22.84% economy capital and 35.19% under the high stress testing.The conclusion and suggestion is given out in Chapter 5. According to the previous chapters'analysis, it reaches the conclusion and offers the suggestion.The main contribution of this paper concludes following aspects:First of all, it gives a brief review of stress testing and the practice situation of some nation.Second, it gives out the definition of the stress testing and analyzes the feasibility of the stress testing. At last it reveals the step of the stress testing.Thirdly, this paper build the stress testing model according to the interest rate risk, exchange rate risk, and stock price risk based on the situation analysis and the sensibility analysis.Fourthly, the demonstration analyzes the credit risk and market risk testing situation. This paper build the model of the commercial bank in China based on the stress testing theory. It reveals the situation the risk of banks, and offers the reference for the practice of stress testing in China.