Determination Of The Credit Risk Of Commercial Banks In China

This paper is started with the importance of researching credit risk. Credit risk is a kind of old risk with long history. In this paper the concept of credit risk is limited to the financial category and this paper mainly discusses the credit risk in our commercial banks. For our commercial banks, credit risk is a kind of risk that has to be faced to and that needs to be resolved as soon as possible. After deeply analyses the credit risk and its management in our commercial banks, that is, the credit risk has been enormously accumulated and the management of credit risk is far behind the standard of New Capital Accord, then the key point of this paper, the management and measurement of credit risk is induced. This paper chiefly researched three credit risk models: CreditMetrics Model, Basel Capital Accord in 1988, and the New Capital Accord in 2004. The comparison among these three models on credit risk measurement is made. Finally, this paper demonstrates how to measure credit risk through a case and puts forward some advice for our commercial banks. This paper has three chapters. In the first chapter, it mainly discusses the importance of researching credit risk. After simply introducing the conception of credit and credit risk, the paper analyses the credit risk and its management in our commercial banks in detail. The increment of non-performing loans has not been effectively controlled and the balance of loans has increased quickly although the ratio of non-performing loans was reduced. Therefore we need to exactly calculate credit risk in order to measure the loss of loans and accordingly, we can ascertain the price of loans when loans are sold. In the second chapter, this paper studies three credit risk measurement models in detail: CreditMetrics Model, Basel Capital Accord in 1988, and the New Capital Accord in 2004. The comparison among these three models on credit risk measurement is made. It also discusses the feasibility of applying the three models to our commercial banks. There are two purposes in Basel Capita Accord in 1988. One is to assure safely running of international banking system by providing standard ratio of capital to risk assets. The other is to eliminate unfair competition among banks in international financial market. CreditMetrics Model is a kind of credit risk internal controlling model. Basel Committee encourages banks to use credit risk internal controlling model in order to measure credit risk. And our China Banking Regulatory Commission also encourages our banks to develop our credit risk internal controlling model. The New Capital Accord has three methods to measure credit risk: the Standardised Approach, the Internal Ratings-Based Foundation and Advanced Approach. The innovation of the New Capital Accord is the IRB Approach. The sensitivity of the capital to risk assets is improved in the New Capital Accord. The last chapter demonstrates how to measure credit risk through a case. For a loan of 1 million yuan with a credit rating at BBB, the credit risk calculated through the above three models are: 80 thousands yuan(1988 Capital Accord), 198.9 thousands yuan(Credit Metrics Model) and 80 or 44 thousands yuan(2004 the New Capital Accord) respectively. From the results of the case, it is obvious that the restriction to capital in CreditMetrics Model is most rigorous. After comparison the Standardised Approach and the Internal Ratings-Based Approach, it thinks that it is better for our commercial banks to carry out the Internal Ratings-Based Approach. It suggests that our commercial banks should prepare for the Internal Ratings-Based Approach to be put into force. First, advanced credit risk management culture and ideas should be established throughout the whole banking. Second, appropriate internal credit risk controlling models should be developed as soon as possible. Third, talents should be first because it is talents who develop internal risk controlling model and measure the credit risk.