The Effect of Collateral in Internal Rating of Commercial Bank
|School||Shanxi University of Finance|
|Keywords||New Capital Accord Probability of Default Loss Given Default Internal Rating Based Approach Collateral|
The New Capital Accord has been announced in June 2004, and it will be used firstly in the Ten-group countries. The New Capital Accord emphasizes the important effect of Internal Rating Based Approaches in the management of risk and supervision of capital. It suggested that the international banks should establish tow latitude rating system to add the acute and standardization to the risk estimation.According to the New Capital Accord, Internal Rating Base Approaches suggest that the commercial banks, which apply this approach, should establish two latitude rating system, that’s Customer rating and Debit Rating. The Customer Rating is affected by the Probability of Default, while the Debit Rating is affected by Loss Given Default. The Probability of Default is mainly estimated by customer’s credit level, while the Loss Given Default is not only affected by the customer’s credit level, but also affected by the debit’s collateral condition.This paper here has firstly discussed about what’s mortgage and how about the commercial banks use the Internal Rating Based Approaches now. It has discussed the collateral type, operates the main point. In thisFoundation, has discussed the loan classification. Overseas credit rating has already been quite mature. They have a lot of theory achievements in the credit rating method aspect. Our country credit rating industry develops later than Overseas. It is quite backward in the credit rating method aspect. Internal Rating Base Approaches is the rating work done by commercial bank to its customer. The method of Internal Rating Base Approaches is similar to exterior rating method. Therefore, in the aspect of the implementation of Internal Rating Base Approaches, the overseas superiority is bigger than the home. But as a result of our country exterior credit rating imperfect at present, the implements of Internal Rating Base Approaches is better choice of commercial banks in our country. As the factors that influence Internal Rating Base Approaches are very many, this article has mainly discussed the collateral factor in Internal Rating Base Approaches. Then the paper will study the relation between mortgage and Probability of Default and the relation between mortgage and Loss Given Default. By analyzing the relation between Customer Rating and Probability of Default or Loss Given Default. The paper comes to a conclusion that the mortgage condition has an important effect in Customer Ratting and Debit Rating. Then, this paper will discuss about the important effects of collateral condition in the Internal Rating Based Approaches. This paper will study the project by logical analyzing, and sometimes uses model analyzing to make the study more clear.Through the study this paper comes to a conclusion:(1) We can quantify the value of the collateral whose asset is at risk. Then, if the market value of the collateral is lower than this value, the customer of the bank will default.(2) With a certain degree, probability of default is related with the value of collateral. Through the creation of a model, we find a quantitative relationship between the value of the collateral and default probability. When more adequate collateral (the smaller the mortgage rate), the greater the percentage of collateral get to cash the greater default distance, the smaller probability default. The main measure of the probability of default based on customer ratings, thus, we can see that there is a great impact on the security rating of the customer.(3) To a certain extent the loss given default is related with the value of the collateral, in the implementation of collateral, but through other channels still cannot be able to recover the loan. In this case, we create a model between the default rate and the value of the collateral. The more fully secured loan (lower collateral rate), collateral get to case, the greater loss given default. Debt ratings measure the loss of an important basis for the conclusion that we can see that the collateral has a profound impact on bank debt ratings.(4) Through the researches above, the paper discovered comes to a conclusion that collateral has the very vital role in the bank Internal Rating Based Approaches, These will benefit setting up the Intemal Rating Based Approaches and the risk management.