VaR Model And Its Application In Credit Risk Control Of Commercial Banks

With the prosperous development of the financial market, financial products were innovationed constantly, the trading structure of the products provided by all kinds of financial institutions, especially by commercial banks, are becoming more and more novel and complex. With financial derivatives emerging endlessly, risks are increasing, especially in those of key account defaults and rigid payment in the current economical situation. The main participants in the financial sector-commercial bank’s environment is more complex, and need to combat difficulties and challenges. Therefore, to correctly identify and control the credit risk is particularly important. Under this circumstances, the existing traditional risk management in identification, measurement, and control has been unable to meet the need of development. How to improve risk control and make it more qualified, more objective, and more effective is a common problem urgently to be solved in modern commercial bank’s risk control.Theories and facts, both at home and abroad, shows that the use of the commercial bank’s risk control which based on the VaR models would solve most of that problems at a great extent, and the applications of the models are widely promoted. At the same time, the Basel Committee demands that the conditional banks combine their internal model with VaR model if possible, to calculate the amount of capital required by the adapted market risk; And the G20 suggest that we should use VaR to measure the risk of derivatives, and believe that it is the best way to measure and control the market risk.At this stage, VaR method has been used and promoted by most foreign financial institutions, and is considered of the main methods for risk measurement and management. The commercial banks in China are using VaR method for risk measurement, supervision, or evaluation, etc.Based on the definition of commercial banks on credit risk, this paper summarizes the characteristics of credit risk and relatively important control methods, introduces in detail the representative models in the world including Credit Cortfolio View Model, Credit Metrics Model and Credit Risk+ Model. This paper also explains their operation principles, assumptions, and carrys on the comparative analysis. Then, it makes a detailed introduction in the VaR model on the field of development and universal use. Finally comes to the conclusion: at this stage, the use of Risk Credit model to measure the domestic banking credit risk is in accord with the domestic situation. In the empirical analysis, this article uses the part industry data in Henan Province branch of Bank of Communications Co., Ltd., verifis the credit risk+ model. The empirical shows that the feasibility and operability of the model is stronger; Compared with the predictive results of the commercial Banks themselves, the model of quantitative results are more reliable;the inadequacies of the model are also pointed out. Because the models are based on certain assumption conditions,if the presumed conditions change the prediction results may not be the same, if macro economic environment changes, the predicted results may be great different with the actual. Therefore, this paper points out that when commercial banks in China use the relevant models, they should consider the current situation, choose the best suitable model, and revise the model parameters, etc. Finally, this paper summarizes the condition of controlling credit risk in our country, then puts forward some suggestions such as improving and promoting the construction of credit rating system, cultivating domestic risk quantification awareness, strengthening human resources supports, establishing and perfecting the laws and regulations of the financial market in China.