China's Commercial Banks' Non-performing Asset Securitization Default Risk Measurement

Commercial banks has accumulated a lot of bad assets in our country recent years.The balance of bad loans in our commercial banks has reached 1.2744 trillion yuan and the defective rate has reached 1.67% by the end of 2015, the two hit a new high. Such a huge non-performing loans not only limit the liquidity of commercial banks,it also pose a serious risk of default to commercial banks.Besides the debt-to-equity swap, the securitization of non-performing assets is an effective way to solve the bad bank assets. Through the securitization of non-performing assets, we can increase the liquidity of commercial banks, spread the risk of commercial banks,add the bank’s ability to resist risks. The commercial banks’ non-performing assets securitization in our country has suspended since 2008 after CCB published jianyuan 2008-1 reforming of asset securitization 8 years ago. We will restart non-performing assets securitization process after NPC&CPPCC, this surely will promote the structural adjustment of non-performing assets of commercial banks in country, and this is a hot spot at present.But the risk of default which from non-performing assets securitization is higher, the measurement and research to the risk of default from non-performing assets securitization is necessary. This paper is written under this background.Based on the study of virtual characteristics, the general operation mechanism,and risk related theory of asset securitization, especially the risk transmission mechanism, we combed out the risk from commercial banks’ non-performing assets securitization process, including the risk of underlying asset itself and the risk in the process of non-performing assets securitization. Commercial banks’ non-performing assets securitization is same with general credit asset securitization in some degree,the operation process is both complex, involve many participants and so on, but the risk of default of non-performing asset securitization is higher than general credit asset securitization. The risk transmission mechanism not only can reduce the risk, but also provides a channel to risk spread and amplification. The due principal and interest of non-performing asset-backed securities is paid by the cash flow of the"asset pool". Therefore, it is the prerequisite and guarantee for commercial bank’s non-performing assets securitization to generate stable and term matched cash flow.While non-performing assets default, it will lead to the interruption of cash flow, this will bring a fatal blow to non-performing asset-backed securition. Therefore, the accurate measurement of the default risk of non-performing asset-backed securities is an important work to the whole non-performing assets securitization process.Based on the study of the four risk measurement models, we choose the KMV model to measure the default risk of the non-performing assets securitization in commercial banks after thinking about China’s national conditions and the actual situation of the commercial Banks’ non-performing assets securitization operations.At the same time ,we correct the KMV model and measure the default distance and default probability to the priority shares and the secondary shares from the non-performing asset-backed securities.This paper selects the case from China Merchants Bank, which was issued on Sep. 19, 2016 and its name is HECUI2016-3 non-performing asset-backed securities. After the empirical analysis of the data, the results show that the modified KMV model is more in line with China’s national conditions. Finally, we conclude the conclusion that we should critically innovate the successful experiences of foreign asset securitization based on the empirical results of the model. The commercial banks’ non-performing assets securitization in our country should in the light of China’s specific conditions. The paper also provide suggestions for the restart of commercial banks’ non-performing assets securitization process.