Chinese Commercial Banks' Internal Rating Practical Research

The Basel II was officially released in June 2004. With its implementation, it will have a profound influence on the global banking development patterns. Basel II demands a stricter control on the banking risks with the focus on the preciseness, sensitiveness and standards of risk measuring, particularly on the role of the Internal Rating Based Approaches of the banks. As Mr. Jaime Caruana, the Chairman of the Basel Committee, says,the functioning rules of Internal Rating Based Approaches as the core technology of Basel II,represents the direction of tomorrow bank-risk control and capital supervision in the coming decade.The modern bank-risk managing is coming to be a new science branch. Traditional banking must integrate the exact mathematical analysis and modern information technology to do a better job. In one word,a better risk control is nothing but a scientific way to measure and supervise and control the risks with the emphasis on the advanced and practical technology of measuring analyzing. The Internal Rating Based Approaches as the criteria to credit risk and the platform for operation plays a key role in banking risk controls. A competing bank shouldr build such a rating system as well as the relevant means for itself and update it for a beter service right now.Finally,a bank should pay great eforts to the data qualifying, measuring models operating and IT facilities updating to advance further.In the recent years, top banks, international banking evaluation organizations and managerial consultants in Euro-American regions poured out quite a lot in the renew of models, systems and insittuitonal developments of the bank internal evaluaiton. Positive results and experiences have gained, from which Chinese banks can learn a lot. With the steady opening of our economy scale and qualified commercial bank's linsting on public stock market,domestic commercial bank has established the business relations in the main economic region all over the world. To competing with the advanced banks from Euro-American regions,we must learn and take advantage of the international "game rules". It is of great urgency for us to research and popularize the IRB.For our country, we should not only integrate the foreign successful experience into our own practice, but also consider the the character of our bank's business, the accordance between risk idea, managing institution, data system and IRB. At the same time, we should organize a group of specialist on duty to maintain, update and innovate the IRB. Chinese commercial banks are at the beginning of constructing the system of Internal Rating Based Approaches, lack of theoretical and experimental experiences. This essay tries to do some analytical introduce work on the above mentioned points.The first chapter of the article, introduces the background of the publication of Basel II, the reason why China will not put Basel II into effect for the time being and the study circumstances of the risk management at home and abroad. The second chapter of the article introduces in sequence the development of Basel II, the outline of Basel II and the major structural adjustment of the IRB, abbreviation of internal ratings-based approach, proposed under Basel II. The third chapter of the article introduces diverse methods and models of internal rating, and the implementation circumstances of internal rating in America, Europe and China. The fourth chapter of the article introduces the internal rating practice of commercial banks of China. The internal rating is a systematic program which is involved with various aspects of banking business. The whole system could be displayed by the diagram above. The internal rating system of commercial banks mainly consists of the two major layer, which is the transational layer and the combinational layer. The transational layer includes client rating and debt rating, where probability of default(PD) of clients and loss given default (LGD) of debts are evaluated, and expected loss(EL),unexpected loss(UL) and other indexes are calculated with the combination of exposure at default (EAD) and months of debts(M).The combinational layer includes regional rating and industrial rating. The final internal rating result is concluded under the combinational verification of the rating result of the exchange layer and the regional rating result and the industrial rating result of the combinational layer. The internal rating result is applicable to the management of various daily business, which includes credit limit, warning system, product evaluation, risk suggestion, set-up reserve, economic capital and combinational management. The basis of the internal rating system is to set up the integral data management structure and IT system, and to design the management structure and order suited with the internal rating in the corporation managerial structure. The fifth chapter of the article introduces the practical implementation of the result of the internal rating in banking business. The sixth chapter of the article put forward several proposals to spread the internal rating system in the commercial banks of China based on practical study.