Research On Subjective Credit Risk Management Of Bank Of Lanzhou Using Big-five Model

For commercial banks in China,credit business,specifically loans,are still the most profitable business.Therefore,risks produced by credit business are still the mostly seen and faced risk by commercial banks.These risks,according to their origins,can be further categorized into credit risk,market risk,operational risk,moral risk,and so forth.Among them,credit risk is the most common one.By concept,credit risk means the debtor does not repay the loan when the loan is due.The reason can be both subjective and objective.When the debtor encounters hardness in its business,or has incident in his family,the business is endangered and the debtor in fact cannot repay the loan,the risk is objective.If the debtor in fact has the money to repay,but choose not to repay due to his subjective reason,the risk is subjective.So,although the result may look the same,that is,the loan is not repaid,but the reason for not repaying is totally different.So different measures must be applied in order to assess the possibility of both objective and subjective risks before the loan is approved.For Bank of Lanzhou,the emphasis of credit risk management is on the assessment procedure of loans before the approval of the loan,including on-the-spot investigation and in-the-office assessment by different department.If one analyze the whole procedure,one will find out that when the loan application reaches the final decision-making institution,the objective information about the loan applier,for example,financial statement analysis and mortgage analysis,is verified and detailed;but the subjective information about the loan applier,that is,the actual person who manages the enterprise,is almost lost.In some case,the actual person who manages the enterprise does not even occur in the investigation report.So,this means,when credit risk has two origins,the loan assessment procedure of Bank of Lanzhou only take one into account,and totally ignored the other.This could be a shortage in a circumstance when the economic boost is going down.This paper is dedicated to fix the shortage caused by the ignorance of subjective credit risk.This paper uses psychological method,specifically,the five-factor personality analysis model,to assess the personality of the person who actually manages the enterprise which is namely the debtor.The author designed a block,including information about the the person who actually manages the enterprise,his/her relationship with the enterprise and its main block-holders,his/her relationship with other companies,his/her assets and debts,etc.,and also the five-factorpersonality analysis of the person(by rating five scales).This block can be added into the investigation report template used by Bank of Lanzhou,as the last block before conclusion,after all the objective analyses are done.A simple training session should be held for personnel of investigation and assessment department before the new block is officially put into use,to make sure the personnel correctly understand the five-factor model,the meanings of the rating,and the connection between the rating and psychological state of the person.In understanding such they will be more aware of the personality of the true debtor,and will be more accurate in predicting his/her business behavior and subjective intention concerning the repayment of the loan.This way Bank of Lanzhou will have an effective approach in assessing subjective credit risk of a loan,and so will be more effective in managing credit risk in credit business.