Credit Risk Management Studies Of Commercial Banks In China

Credit risk is one of the oldest and most significant forms of risk in the financial market. It is also the most critical risk that commercial banks and other financial institutions must face. If we use actual bank’s risk capital allocation as a reference, credit risk counts for 60% of total bank risk exposure; market risk and transaction risk only count for 20% respectively of total bank risk exposure. Thus, credit risk measurement and management is always the focus of commercial banks.Around the theme of this thesis-credit risk management of commercial banks in China, First of all, I will first explain briefly the related concepts of credit risk and commercial bank credit risk, conditions of risk generation and its characteristics. Then, I will discuss that credit risk management is the most important activity in commercial banks risk management. Second of all, I will introduce the main approaches and practices in credit risk management. Combined with the current credit risk situation and existing problems, I will provide the credit risk management strategies from commercial banking perspective as well as from the entire society perspective.The first part of this thesis is the introduction of commercial banking credit risk management and I will also cover the main approaches of commercial bank credit risk management. First of all, I will summarize the credit risk connotation and characteristics. I will clarify the difference between broad definition of credit risk and narrow definition of credit risk. This thesis only focuses on credit risk in the narrow definition in commercial bank credit loan business. Information asymmetry between commercial bank and enterprises is one of reasons that create credit risk. Other reason is Ethics risk. In addition to general characteristics of financial risk, Credit risk demonstrates its unique characteristics such as non-systematic and "lilt, fat tail" probability distribution. Second of all, this thesis will describe the concept of commercial banking credit risk and it’s forming conditions. I believe that there are three prerequisites for the creation of commercial bank credit risk:the minute division of principal sector of the economy, the uncertainty of economic activities, and the deviation of actual results from expected targets in economic activities. Thirdly, I will summarize the characteristics of credit risk management in commercial banks:1. emphasizing the correlation of credit risk and diversification of credit risk.2. Regulatory requirements specification and standardization 3.attach equal importance to "big three risks" 4. The complexity of risk measurement models,5. Strong IT support 6. Improving risk management, policies and regulation. Finally, I will introduce the main approaches in the credit risk management- credit rating for customers, facility rating and diversified credit risk evaluation.The second part of this thesis analyzes current status of commercial bank credit risk and existing problems. First is the analysis of commercial bank credit risk current conditions, including 1. Credit risk lack of diversification.2. Potential risk from credit expansion 3. Related-party transaction and related-party assurance of financing, which magnified credit risk.4. Credit loan by private enterprise has relatively more credit risk. Secondly I will introduce the success that commercial bank credit risk management has achieved:1. credit risk management system has been enhanced and become more robust; 2. commercial banks have gradually developed the culture of credit risk management; 3. Commercial banks have more advanced classification of credit rating methods and credit loan classification become more scientific, etc. Finally, I will identify the gap of credit risk management between China’s commercial banks and foreign commercial banks in terms of risk management appreciation, management concepts, management system, management approaches, and management techniques.The third part is the core of this thesis. From the commercial banking and our society perspectives, I will discuss the strategies of credit risk control. First, I will introduce the control measures for commercial bank credit risk:Credit ceilings, Credit investigation and approval, Bank loan approval, After-credit management, economic capital evaluation, measurement and allocation, asset backed securitization and credit derivatives. Finally, I will suggest establishing credit risk management system with Chinese Characteristics from national level; the entire society work together to prevent credit risk:1. Establishment of independent regulatory and incentive mechanism under the joint efforts from government, industry associations and credit service organization.2. Put the credit activities into scope of macro-control and adjustment,3. Speed up the development of credit management sector.4. Improve and enhance credit legal system.5. Emphasize the government’s reinforcing role to develop credit system.