Study On The Credit Risk Mitigation Instruments Used In The Commercial Banks

Credit derivative is a variety of tools which are used to separate and transfer thecredit risk. It developed quickly in the world since it was put up with by theInternational Swaps and Derivatives Association in1992. There are four importantcredit derivatives, credit default swaps, total return swaps, credit linked notes andcredit interest rate options. Credit default swaps make the transactions of the creditrisk in the market possible. Credit derivatives were developed until October29,2010.<credit risk mitigation tool operation guidelines> issued by National Association ofFinancial Market Institutional Investors means Chinese Credit derivatives hasappeared.Spotlight has been on Chinese version’s CDS credit risk mitigation instrumentssince they were launched in the interbank market in2010, but the trading of the newproducts is not active, the risk mitigation mechanisms and effect of credit riskmitigation instruments in the commercial banks have to be further analyzed.Therefore this paper introduced the definition、classification、trading principles andrisk release efficiency of credit risk mitigation Instruments firstly. Owing to the lackof domestic market transaction data, this paper analyzed quantitatively an annualpanel data of13American banks, showing that the use of credit risk mitigationinstruments does not reduce risk-weighted assets directly, but with the risky assetsconstant, it can help banks to increase loan balance, more specifically, aftereliminating over-speculation consideration, banks can increase loan balance up toaround63%. Because the development of the credit risk mitigation in our country isstill in its infancy, there have many problems, based of which this paper presentsrelevant recommendations, for example, cultivating a market environment which infavor of development. The commercial banks develop credit risk mitigation shouldchange the traditional business model, establish a risk warning system, strengthencontrol over the derived risk, cultivate the relevant talents and so on.