The Study On Application Of The IRB In Credit Risk-Bank Of China

BaselⅡAccord allows banks to adopt the internal rating-based approach (IRB), which is based on the theoretical and practical development of risk management system. Internal rating-based approach is a revolutionary change to the traditional way of risk management. It represents the modern concept and technology of risk management adopted by multi-national banks. Commercial banks can draw on these experiences to improve their credit risk measurement technology, strengthen the structure of risk management organization and reform the risk management process. Implementing IRA could precisely quantify risk, develop the level of operation management, and improve the competitiveness in the market. This is the certain demand for improving the ability of credit risk management. Currently, the risk measurement technology of commercial banks in mainland China is far beyond the requirement of the BaselⅡAccord. In order to expand domestically and to compete globally, both the commercial banks and the supervisory institutions should have a sound credit risk quantification system. Bank of China, as a highly globalized listed bank, it becomes a critical and urgent issue to implement the new credit risk quantification technology.The first , focuses on the investigation of the theoretical structure of IRA, comparing it with the standard approach to underline the implementation feasibility and advantages of IRA in our country. It also discusses some successful examples of the application of IRA in the United States and Switzerland. review on the history and development of the credit risk ranking system adopted by Bank of China. It also analyzes the difference between the current approach and the internal rating-based approach. And therefore elaborates the necessity of implementing IRA.The second , gives a detailed discussion on the core concept of linear (1-dimensional) rating approach, the Probability of Default (PD) Model. It also introduces the formation process, the early achievement and the current application of Bank of China's PD model. Discusses the technique of implementing a 2-dimensional rating system and raises the pre-conditions of creating Loss Given Defualt (LGD). It also suggests the building of necessary matching facilities like data support, system optimization and business flow processes. The third, elaborates the functional significance of IRA in Bank of China's fundamental credit management process like credit approval, loan pricing, credit limit management and risk alert, etc. It also indicates the important role of IRA in the combined management system like credit policy drafting, reserve calculations, economic capital allotment and RAROC assessment, etc.The final part comes the conclusion. The core concept of internal rating system should be based on PD and LGD model.At present, the credit risk assessment system in BOC has not yet been linked to PD and LGD. The assessment result is not precise enough and therefore the system is insufficient in quantifying risk. Bank of China should study the risk management model based on IRA, and to figure out an effective risk internal rating system to optimize the entire risk management process. By studying the IRA requirement, BOC could find a way to improve our risk quantification technique as well as the new business process under IRA. The article suggested a foresighted idea on the direction and strategy BOC could adopt in applying the new IRA. And finally being able to meet the requirement set by the BaselⅡAccord.Improving the ability of credit risk management.