Non-performing Loans Stress Testing Of Chinese Commercial Banks Based On VAR Model

The financial tsunami caused by the US subprime crisis impacts the BaselAgreement Ⅱ(The New Protocol) severely in2008.The Basel supervision committeeintroduces the Basel Agreement Ⅲ after International bank regulators leant theshortage of the old system. The new agreement aims at reinforcing the supervision ofthe Commercial Banks’ capital adequacy ratio. As the mother natural of the businessof commercial banks is commercial, there are many unavoidable risks, whichincluding Credit risk, market risk and operational risk, liquidity risk, and etc. Alongwith the expansion of Commercial bank loan industry, the corresponding credit risksare skyrocketing leading a numerous demands of controlling and preventing the risksby commercial banks. Therefore, the new agreement conducts explicit guidance ofcommercial bank risks evaluations by requiring integrate Capital pressure test indifferent nations, which benefits in forecasting the potential lost caused by all kindsof risks inside the system when the financial economic market is under normalcondition. Stress testing is an innovative analysis tools used to assess the condition ofcommercial banks’ first core by regulator. The efforts of “Abnormal but possible”Macroeconomic factors to the interior of commercial banks are simulated by thestress testing. The stress testing is able to evaluate and diagnosis the risks and thin icezone in system in advance which greatly strengthens the image of the relationshipbetween the banking system and Macroeconomic factors. Moreover it makes thepossibility for regulator to evaluate the endurance to the risks of the commercial bankwhich allows the financial system right and improve itself in advance basing theresults of the stress test and reduce the possibility of risk.After2001when china officially joined the WTO and foreign financial institutions and capital start enter domestic financial market, interior impacts ofchina’s financial system and credit risk increase dramatically. Under suchcircumstance China’s commercial banks face an accelerated Market Reform whichneeds to identify the interior risk, reinforce the wind control measures and upgradethe Governance mechanism. However the China’s Bank supervision and managementcommittee only focus on management and prediction of Bad loans of commercialbanks credit risk. It is highly necessary to analyze stress testing of the changing trendof the commercial banks’ bad loan.The article studies the new Basel Agreement’s interior rating method ofcommercial banks’ credit risks, considering the reality of China, using Econometricmethod to analyze the credit management and current research results and developingtrend of China’s commercial banks, as well as a stress testing conduct to analyze thebad mortgage rate.Primarily multiple academic reports are studied and integrated by the anther bycataloguing Common macro economic variables into3kinds which are: real value,Year-on-year growth rate and the annulus comparing growth rate, taking NominalGDP, Various term deposit, loan interest rate; Real Estate Climate Index; Enterpriseconfidence; Nominal money supply; Urban per capita disposable income etc (in total30) variables in to consideration, and utilizing multiple linear regression model asMacro pressure test model to survey Bad Loan Ratio of China’s commercial banks.The results reveal that, the one-year flow money on deposit, loan interest rate, TotalGDP growth, the consumer price index annulus comparing growth rate, and nominalmoney supply current value have a significant explain relationship with Bad LoanRatio, specifically the one-year deposit rate and Consumer Price Index are positiveproportional to the bad loan rate, benchmark one year deposit rate, Consumer PriceIndex are negative proportional to the bad loan rate, which match the reality.Secondary Structured VAR model is applied to analyze and predict the dynamiccontacts between five macroeconomic variables, addressing the relevance oftraditional pressure test model’s weakening variables by studying Current associationof the variables in the model. Lastly, a stress testing is conduct. The scenario is set upbasing on the trend of historical macroeconomic variable and China’s policy. A proper stress impact is applied through Nominal GDP and one-year loans interestrates to study and forecast the tendency of China’s commercial bank’s bad loan rates.And empirical results are analyzed along with practical suggestions.