Research On The Credit Rating Method Of Commercial Banks

The New Basel Capital Accord put credit risk management into the heart ofcommercial bank management, presented that credit risk management by the standardmethod should be advanced step by step, and made a clear guidance to the IRB andthe specific implementation details of the IRB, the current internationally renownedbig banks not only implemented the IRB successfully, but also with the help ofmodern measurement model, they have conducted a series of innovation anddevelopment on the specific methods of measurement to the IRB.China’s commercial banks were operated with administrative intervention for along time, then they faced the impact of the reform and opening up, to deal with thechallenges in the management of internal management that was not standardized aswell as the following pressure from the domestic and international financial markets,it need to improve the management urgently. Credit risk management as an importantcomponent of banks’ risk management, have a major impact on the bank’s overall riskand management. Under the guidance of the New Basel Capital Accord on credit riskmanagement requirements, China’s commercial banks should start from the standardmethod and with the help of the professional external ratings based on the creditrating agencies which developed on the past two decades, learn from the advancedrating methods from rating agencies, especially large-scale joint venture ratingagencies, and the accumulate the raw data, paving the way for the IRB.IRB is divided into primary method and higher method, China’s commercialbanks have tried out the internal rating primary method referenced to a fixed financialratios and other indicators to determine the status of the borrower’s credit, in order toestimate the rate of delinquencies and loan losses; a small number of developedcommercial banks began to explore the higher method of the IRB, the implement ofstandard method and primary method have accumulated the data base for it, while formodel selection, consider that VaR is generally used by the financial institutionsgenerally to determine the level of risk，but VaR is used most for market riskmeasurement, there are some limitations in the measurement of credit risk, thus the introduction the improvement of VaR methods—the CVaR methods based onCreditMetrics Model, CreditMetrics model is characterized by taking the borrower’scredit rating level and the level of credit rating changes into account，CVaR methodnot only solves the limitations of the VaR method, but also it is more susceptible tothe bank acceptance for its saving on management costs. In addition, China’scommercial banks with the early accumulation of data and methods can meet thebasic conditions to implement the CVaR Methods in China’s commercial banks.