A Study On Risk Management Of Credit Asset-backed Securitization Of Commercial Banks Of China

Asset-backed Securitization was once regarded as one of the biggest financial innovations of the 20 th century and its process goes as follows: the originator selects the illiquid underlying assets with stable future cash flows, forms the pooling of illiquid underlying assets and sells them to a Special Purpose Vehicle so that the assets are removed from the originator’s balance sheet. And the SPV will fulfill the tasks as tranching of the underlying pool, credit enhancement and ratings, eventually issuing corresponding securities to the public capital market. Since its invention in America back to 1970 th, Asset-backed Securitization has dominated half the direct financing market in the USA for its innovative structured financing design and has been welcomed by investor across Europe, Asia and Latin America. Standing the test and doubt of the 2008 financial crisis, Asset-backed Securitization has gradually revived to its power due to the improved disclosure and strengthened regulation set by the regulatory institutions.Credit Asset-backed Securitization forms an crucial part of Asset-backed Securitization products and its underlying assets are credit assets, having financial institutions like banks as originator. Due to the dominating role of banks in our finance system, the Credit Asset-backed Securitization develops most rapidly in China. Since the launching of Asset-backed Securitization pilot in 2005, The China Banking Regulatory Commission and People’s Bank of China has been building the required Institutional Foundations, including doing research and setting legislation in fields such as the choice of organization, the process design, accounting and taxation. One characteristic is stipulating the Special Purpose Trust as the form of Special Purpose Vehicle, which is the best choice in accordance with the present legal system of China and ensuring the effects of true sales and bankruptcy-remote.The issuing of Credit Asset-backed Securitization can bring many benefits to all the participants involved. The benefits for the originators: reducing the financing cost, increasing the assets liquidity, adjusting the credit asset structure, fulfilling the regulatory capital and diversifying part of credit risks. The benefits for the investors: an extra investment choice with relatively higher interest and lower risk. The benefits for the capital market: accelerating the transformation of specialists agencies, increasing the transparency and rationality of finance pricing process and boosting the capital distribution efficiency of the entire capital market and credit market. Considering its significance as to constructing multi-tier capital market as well as improving the capital market environment, it is no doubt that Credit Asset-backed Securitization played an crucial role in the financial system reform in China.Adopting the logic of putting forward solutions through analyzing the problem, the paper focused on the risk management of Credit Asset-backed Securitization and proposed appropriated suggestions for the its better development. First comes the literature review and forming a basic understanding of Asset-backed Securitization, which include the theories about Credit Asset-backed Securitization, its history in USA and China and the detailed description of product structure design and issuing process in commercial banks in China. Then comes to the topic of this paper i.e. risk management and the applied theories as Analytic Hierarchy Process and grey system theory. Taking the steps as risk identification, risk measurement and risk control, the paper demonstrates fourteen kinds of risks which fall into four categories. Last is the introduction of Jianyuan 2005-1 Individual Housing Loan Mortgage Securitization Trust and the specific analysis of its issuing enviornment and risks. Utilizing the data from Consultancy Questionnaire, the function accumulation and the matrix process, the paper comes up with the risk weight of each kind of risk and the comprehensive risk evaluation value of this product. To validate the analysis progress, the comparison between comprehensive risk evaluation value and the credit rating results disclosed by the regular trustee reports on Jianyuan 2005-1 Individual Housing Loan Mortgage Securitization Trust is made and and the result is satisfactory.The findings of this paper tell us the most urgent risk is Market Risk followed by Credit Risk, Enviornment Risk and Technique Risk and to be more precise the top four risks are Liquidity Risk, Default risk, Interest Rate Risk and Economy Risk. Our suggestions for the findings are: strengthening the liquidity regulation for financial institutions like banks especially the requirement of Capital Adequacy Ratio, promoting the improved disclosure requirements, establishing the social credit system and advancing the progress of specific legislation for Credit Asset-backed Securitization.The research approaches ]include theoretical study, practical analysis, quantitative and qualitative analysis and descriptive statistics. The research techniques are listed as follows: Function in Excel, the software of YAAHP 9.2, the Matrix Calculator available on line and the Consultancy Questionnaire.The originality and value of this paper lies on the combination of AHP and grey system theory which enable the profound analysis of the product Jianyuan 2005-1 Individual Housing Loan Mortgage Securitization Trust, coming up with the risk weight and the comprehensive risk evaluation value to be supportive for the final recommendations.