A Research On The Credit Risk Transaction In Chinese Banking

This paper studies the credit risk transaction, explaining the significance when it is applied in practice, and analyzing the fundamental conditions when the market for its set-up. In addition, as far as Chinese case is concerned, this paper explains the significance when the credit risk transaction is applied in practice for Chinese commercial banking, analyzes the conditions when the market for it is set up and the types of the product are choosen, and addresses what work should be done when the credit derivative market is set up and developed well. This paper includes 6 chapters.Chapter I IntroductionThis chapter mainly introduces this paper's background, structure, research methodology, possible issues for further research.Chapter II The basic theory and practice for the credit risk transaction for commercial bankingThis chapter mainly studies the significance of the credit risk transaction when comparing it with credit risk management in traditional banking. This chapter, making clear definitions for credit risk and credit risk management, tries to find the internal logical structure for credit risk management in banking, to find difficulties in it, and to summarize the countermeasures for it, basing on which this chapter analyzes the virtues of the credit risk transaction.Commercial banks are facing with difficulties in credit dilemma when doing the business of credit loans and credit risk management. The traditional measures are not effective, including increasing amount of loans, transfer of loans, securitization, etc, in that there are difficulties in real transfer of assets and in maintenance of customers'relationship. Banks are able to manage the credit risk of stock credit loans actively and dynamically through the transaction of credit derivatives in that the credit risk transaction is not related to the transfer of real assets, which not only solves the problem of"credit dilemma", but also balances and optimizes their own risk. Additionally, the credit risk transaction improves the efficiency of the risk allocation in the whole financial market, improves the pricing system for credit risk, and creates opportunities for non-banking organizations and individuals to participate the market, which is useful for the safety and stability of the banking and financial system.Chapter III Credit risk management and the credit risk transaction in ChinaThis chapter analyzes the features of Chinese stock loan in banking and its weakness, and argues the significance in the introduction of the credit risk transaction into practice for Chinese banking, in terms of the function of it.This chapter argues, basing on the statistics of Chinese financial structure and of industrial distribution of the entire banking credit assets, that there are differences among banks as far as the loans to regions and industries are concerned, while the credit risk is accumulated together. This chapter then proves that asset portfolio is able to reduce the amount of risks, and to affect the calculation of a single credit loan asset, which strengthens the necessity for the introduction of credit risk transaction in Chinese banking.Chapter IV Analysis of conditions for credit derivatives'pricingThe credit risk transaction bases on the pricing of credit derivatives. This chapter analyzes, basing on the principles and measures of credit derivatives, the conditions and data needed for the pricing. Then this chapter analyzes the fundamentals for credit risk transaction in future China.This chapter analyzes the conditions, parameter estimation methods, data needed for the credit derivative models, basing on which this chapter argues that more product in bond market should be introduced, more structures for bonds'period should be introduced, interest rates adjusted by the market should be encouraged, and the bench mark of governmental bonds'yield curve should be set up. This chapter also argues that there are measures for banking should be taken, including the construction of matrix for customers'rating and of data for their default, the improvement of them in content and quality, etc.Chapter V Preparation for the set-up of Chinese credit derivative marketThis chapter mainly analyzes the timing and preparation for the se-up of Chinese credit derivative market.This chapter, basing on the study of foreign market development and the choices in product made by the west countries and new-industrial economies, concludes the basic conditions for the introduction of derivatives, including real demands, macroeconomic background, sufficient legal system and supervision system, and advanced spot market as well as rational market. This chapter, when applying what is mentioned above as a framework, argues that the timing is almost right for China, and that there are some works should to do.This chapter also argues, in terms of changes in financial system, that the Central Government should play the key role in the set-up of Chinese market in that the Chinese banking reform is not over.Chapter VI The choice and design of Chinese credit derivativesThe global"secondary loan crisis"is a bad example for the management of credit derivative risk. This chapter, basing on the analysis of the background of the crisis, argues that on the one hand the derivative plays a positive role as a firewall in banking system risk; on the other hand it plays a negative one as an accelerator.Then this chapter argues that the negative role mainly results from the following factors: the immaturity of financial market, over speculation in derivative, over-deriving, under estimation in risk, insufficient supervision by authorities, defaults in information reporting system, etc. Finally, this chapter comes up with ideas related to the choice and design of Chinese credit derivatives.The contribution of this paper:I This paper, basing on the mathematical proof that portfolio is able to reduce the amount of total risk in credit loan, and on the statistics of credit loans from different banks to different regions and industries, argues that the credit risk transaction is able to reduce individual bank'total amount of risk and its costs.II This paper, starting from the analysis of the principles, measures and conditions for pricing models, then analyzing the data needed for the models, gives the advice for improving the bond market and argues that the content and quality in data is needed on which the banking is pricing the derivatives.III This paper, studying the development of financial derivative product in west countries and Asian new-industrial economies, analyzing the fundamental conditions for the introduction of derivatives, and analyzing Chinese real situation, argues that the current period is the right timing for the set-up of credit derivative in China.