China's Commercial Banks Credit Risk Management Studies

Commercial banks that operate currency are the hub of national economy. Because all economic activities as currency for its first drive power, as obtaining currency for its fundamental purpose, these factors make commercial banks become the aggregation center of various economic risks. For the bank, Credit risk is the biggest and the most important risk, the major factor which results in bankruptcy. As between commercial banks and its counterparties exist asymmetric information and incomplete contract, credit risk is objective reality and widespread in commercial banks. In order to control credit risk within risk tolerance/appetite, to avoid the failure of commercial banks, to achieve a balance between return and risk, to provide guarantees for different types of targets, commercial banks must effectively manage credit risk.With the boundaries between credit risk and other risks went increasingly blurred, the competition among commercial banks become progressively fiercely. So credit risk will be growing difficult to management. Commercial banks need under the guidance of an integrated risk management theory to manage credit risk. An integrated credit risk management system should include the nine major elements:internal environment, objective setting, credit event identification, credit risk assessment, credit risk response, control activities, information & communication, monitoring and stress testing. Internal environment is the basis of other elements; credit event identification, credit risk assessment and credit risk response are the key elements of credit risk management.Generally, commercial banks' property rights are controlled by the central government and local government in china, state-property rights has the features of non-exclusive, non-competitive and non-deterministic, these make commercial banks would appear credit behavior "regardless of risk". Due to the dominance of state-owned shares, commercial banks difficultly depart from government's will than to run independently under market principles. State-owned enterprises commonly possess phenomena of "soft budget constraint", and its credit level to some extent is equal to state's level, these reasons lead commercial banks not only to prefer loaning to state-owned enterprises, also likely to cause negative behavior. The above reasons are the special reasons which caused China's commercial banks credit risks, also increased the complexity of corporate governance.Because effective corporate governance practices are essential to achieving and maintaining public trust and confidence in the banking system, which are critical to the proper functioning of the banking sector and economy as a whole. In order to improve internal environment for providing credit risk management with institutional and cultural basis, commercial banks need to enhance corporate governance, strengthen risk management philosophy, to assign roles and responsibilities of risk management stakeholders, to establish integrity and ethical values. At the same time, commercial banks should have an effective internal controls system and a risk management function (including a chief risk officer or equivalent) with sufficient authority, stature, independence, resources and access to the board. In order to improve the corporate governance, commercial banks need to optimize the ownership structure, to perfect checks and balances mechanism, to enhance the independence of board directors and independent directors, to strengthen the role of board, to establish long-term performance and risk management should be aligned with compensation incentive and restrain mechanisms, compensation should be aligned with risk.Credit events represent opportunities or risks, in fact, Credit events that represent risks arc default events. Commercial banks can use environmental scanning, process analysis, empirical methods, internal analysis or the Delphi method to identify credit events, to analyze influence factors, to provide useful information for credit risk assessment. Credit risk consists of four elements:PD (Probability of Default), LGD (Loss Given Default, LGD), EAD (Exposure at Default, EAD) and M (Maturity). The core of credit risk assessment is to assess accommodators or counterparties probability of default and its impact, the impact represents the loss to commercial banks, which can be divided into expected loss, unexpected loss and abnormal loss. Credit risk assessment actually equal to assess these four elements:PD, EAD, LGD and M. Under the Internal rating-based approach, the most important tasks of commercial banks are PD assessment. Commercial banks can use Altman-Z score model, ZETA score model, Logit model, KMV model, Credit Metrics model, Credit risk + model, CPV model and other models for assessment. This paper comparatively analyzed the four modern credit risk assessment models, also evaluated its applicability in china. Moreover, the paper also studied China's Commercial Banks how to implement IRB.Having assessed relevant credit risks, commercial banks should determine how it will respond. The main measures of credit risk response are the use of credit risk mitigation tools. Through the application of credit risk mitigation tools to reduce or transfer PD and LGD & EAD values, so as to achieve the purpose of reducing and mitigating credit risk. The main credit risk mitigation tools include collateral, netting, guarantees and credit derivatives; otherwise, Credit risk mitigation tools can reduce credit risk regulatory capital. In addition, commercial banks can use the method of downgrade trigger to reduce credit risk.CBRC has drawn up the timetable of implementing the new Capital Accord, and has encouraged our commercial banks under IRB approach to calculate credit risk capital but because of lacking of complete and reliable data, moreover, external credit rating agencies have insufficient authority, poor impartiality, inadequate independence; Furthermore, social credit system hasn't established; these reasons made China's commercial banks hard to implementing the new Capital Accord.Stress testing is an important complement of the commercial banks' risk management systems. Stress testing not only should be considered as elements of credit risk management, also should form an integral part of the overall governance and risk management culture of the commercial bank. It provides a forward-looking risk estimates, overcoming the limitations of risk assessment models and the hysteresis of historical data; Stress testing should also be used to support a range of decisions, In particular but not exclusively, stress tests should be used as an input for setting the risk appetite of the firm or setting exposure limits, the basic procedure of Credit risk stress testing include the following:Select the target of credit risk stress test assets (business) portfolio; determine credit risk stress factors and pressure indicators; design of credit risk stress scenarios; design of the transmission mechanism of stress testing; analysis stress test output and its applicationThis article has explored China's commercial banks how to carry credit risk stress testing practices out.