The Internal Ratings-based Advanced Approach In Basel Credit Risk Framework Applied In Small And Medium Enterprises Single-industry Commercial Circles

In recent years, the importance of small and medium enterprises (SMEs) is more outstanding than ever, so does the problem when SMEs turn to banks for their financing. The market spontaneously chooses the business model called "commercial circle financing" by which banks can get a package of customers from a commercial circle easily and cheaply on the one hand while SMEs can bargain for lower interest rate. However, to take better advantage of this business model, an effective credit risk management system must be established for SMEs, which is the aim of this dissertation.First, we define SMEs and commercial circle, and then focus on SMEs’ single-industry commercial circle to maximum the similarity in credit risk between enterprises. Next, by listing the researchs on SMEs, we can easily tell that there were few research on single-industry commercial circle and why this dissertation is innovative.Considering the supervision of banks, the credit risk management system of SMEs’ single-industry commercial circle we establish follows the rules in Basel Accord. Basel Accord’s leaning towards Internal Ratings-based Approach (IRB) and IRB’s comparative advantages (compared to external ratings and the Standardised Approach) show that we should develop our system in the framework of IRB, especially Internal Ratings-based Advanced Approach. But unfortunately IRB does not have detailed rules for SMEs, also the existing models do not suit for SMEs. So banks have to build their own credit rating model, as it is shown by banks in developed countries.Our model has five steps to go:the first step is the selection of commercial circles and customers, also the commercial circles will be divided into single-industry commercial circles, which is a little complicated for online commercial circles but can be done through Cluster Analysis. The second step is the calculation of Probability of Default (PD). The qualitative and quantitative variables which are chosen by Factor Analysis Approach because they are related to PD are processed by Analytic Hierarchy Process (AHP) and Generalize Linear Models respectively. The outcomes are aggregated and mappinged to PD. Thirdly, one method is selected from five existing methods since it suits Chinese banks’case most and converted into a two-stage model so that it can be used to calculate Loss Given Default (LGD). The fourth step is the calculation of Exposure at Default (EAD), Maturity (M), capital requirements and Risk Weighted Assets (RWA). These can be done according to Basel Accord. Last but not the least, we propose post-loan risk management. Banks should supervise seven aspects and once defaults happen in a single-industry commercial circle, the customers inside should use conditional probability instead of PD to sound the alarm.Chapter four is an empirical study. At the end of the dissertation, we give a hint about further study which is impossible only if there are plenty of data.