Dissertation > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Credit

A Study on Credit Risk Stress Testing in Commercial Bank of China

Author LiuYuCui
Tutor RenBiYun
School Tianjin University of Finance and Economics
Course Finance
Keywords Macroeconomic Credit risk Commercial bank stress testing
CLC F832.4
Type Master's thesis
Year 2010
Downloads 157
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America’s subprime mortgage crisis triggered many financial institutions collapsed, the main reason is their poor management of credit risk. As a result, how to control commercial bank’s credit risk is the most valuable thing for us to study. VaR, as a widely accepted technique to quantify risk, It was used to measure risk of loss under standard condition. Given the complex nature of the real world, institutions need a new approach to explain the abnormal loss under extreme conditions. Stress testing is a method which can be used to measure the effects to the financial institutions by the events which is extreme but may be occured.In order to understand once the country’s macro-economic decline, various economic indicators extremely change, what kind of credit default risk will be brought to the bank. This article based on using the method that foreign banks use macroeconomic factors on credit risk stress testing for reference. Taking the characteristics of China’s macroeconomic and financial system and the available of the data into account. We Construct the model to find out the effect of macroeconomic factors to the different types of banking institutions on the credit risks. On this basis, we assume the macroeconomic was in extreme situations, to analyze the loss of different types of banks in the stress scenarios. In the end, we use the Monte Carlo simulation to simulate the rate of bad loans on different scenarios.The results showed that different types of macroeconomic factors had different effects to China’s NPL ratio of commercial banks in the path and extent, and it had a significant time lag effect between macroeconomic variables. Under the three setting pressure situations, in pace with the extreme changes in macroeconomic, the NPL ratio of various types of commercial banks had increased significantly, however, we should focus on the end value of the distribution of NPL ratio in different scenarios. As in the confidence level of 99.9%, the largest NPL ratio of state-owned commercial banks was between 14.5%-14.8%. while the NPL ratio in Joint-stock commercial banks was 1.92%. These figures are far more than the NPL ratio in benchmark cases. Therefore, Chinese commercial banks owned a huge potential credit risk.Finally, we made recommendations for the use of stress tests by China’s banking institutions. These include:Establish related norms and standards; Increasely training of measuring Talent, then form their own talent advantage; Enhance data collection and sorting; establish model for risk-factors stress testing as soon as possible; Strengthen the simulation of scenarios and analysis about it; As for credit risk stress testing, a particular link should be given to the loan account in future; to ensure that credit risk stress testing and risk management of the whole Bank effectively joined.

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