Comparison And Analysis Of Modern Commercial Bank Credit Risk Models

According to the item 31st of Basel Accord: "Bank’s management needs to prepare for a variety of risks, and for most banks the most important risk is credit risk that it could not carry the risk of loan repayment" This is a profound summary of historical experiences of the international commercial bank management, but it also shows that credit risk is the major risk faced by commercial banks. Credit risk, as the oldest and most important form of the financial risk in the financial markets, has always been the focus and difficult point of the banks’ risks management. Especially with the development of productivity and social progress, the strengthening trend of the world economic integration, as well as the implementation of the financial sector access to the system after China’s accession to WTO, the world commercial banks are facing more and more competition. In this case, it is particularly important to strengthen the quantitative research of the commercial banks’ credit risk.At present, China, which is relatively lagging behind in the managing technique and level of the credit risk management, is just beginning the quantitative research of the credit risk, so there are still a lot of theoretically problems not resolved. Compared with the commercial banks in the developed countries, the China’s commercial banks’ credit risk has serious problems in the qualitative management:1) The unsound management mechanism of the credit.2) The lagging methods and artifices of the credit management.3) The inadequate management institutions of the credit risk.4) The high proportion of non-performing loans.5) The low capital adequacy ratio of the banks. On the other hand, in the bank credit risk management, the western scholars not only set up a series of advanced management theory and scientific methods for qualitative analysis, but also worked up the corresponding risk management models for quantitative analysis. However, due to the big difference between the domestic banks and banks in Western countries, both in the banking business environment and in the management mechanism, it is our issue to be studied whether or not the Western’s risk management models still work in China. Therefore, this article attempts to explore this issue by comparative analysis of the internal rating models.In order to have a detailed understanding of the credit risk of China’s commercial banks, in this paper, a comprehensive overview is conducted initially resulting from the status quo of the studies on credit risk at home and abroad, then starting from the general theory of the commercial bank credit risk, the definition, types, characteristics and causes analysis of credit risk, and issues related to the credit risk management of China’s commercial banks are introduced. Then the famous modern Western four internal rating models, EDF model, CreditMetri model, Credit Portfolio View model, CreditRisk+ model, are presented with qualitative and quantitative comparative analysis, during which the advantages and disadvantages of the models, the case calculation and the analysis and research of assumptions apply are stressed. Hereafter, let’s put these four models into the actual status of China’s financial environment and combine with the applicability of the model in China’s actual situation to make comparative analysis. Through the analysis of all aspects above, the EDF model adapted to the China’s credit market environment is selected and empirically tested. Finally, some recommendations are proposed to the quantitative management of China’s commercial banks’ credit risk.