Research On Risk Of Real Estate Loan In Chinese Commercial Bank

As the biggest part of asset of commercial banks, which act as the natural institutions of dealing with risk, the risk management of loan becomes an eternal topic. The research on risk of loan is particularly important now in China. This topic can produce a lot of questions, and this paper will focus on the analysis on risk of real estate loan.The phrase"risk of loan"in this paper refers to the possibility of the depreciation of the loan's value in commercial banks, even the entire value of the banks because of some uncertain reasons. The using of"risk on real estate loan"mentions the possibility of the depreciation of the asset that commercial banks lend to the real estate industry, including the mortgage loan and loan to real estate developer. Risk of loan in this paper is not the same with credit risk, or operational risk, or market risk, or the sum of the three. It refers to the part of these kinds of risk which affects the loan value in commercial banks.What's more, when talking about"risk which affects the loan value in commercial banks", this paper discusses two kind of risk in Basel New Capital Accord (credit risk and operational risk) and policy risk. Because the market risk affects asset portfolio more than a specific loan, it is not included in this paper. Policy risk has been discussed because the real estate industry concerns to the daily life of everybody, our government's regulation must be strong and frequent. The adjustments must affect the value the real estate loan deeply.The analysis on risk of real estate loan will be carried through by three parts. They are macro perspective, industrial perspective and micro perspective. In the first part, the paper will talk about the policy risk. The operational risk which shows most characteristics of the real estate industry will be put mainly in the second part, with a short fraction in the third part. And the credit risk will be described through out the whole paper. But what must be pointed out is, these three can not be always distinguished clearly.In the macro perspective, this paper will research on the relation between the real estate cycle and business cycle, in order to check that if these two cycles acts the same trend and which one performs a higher volatility. The real estate market often runs tightly after the business cycle, and mortgage loan is always long term loan which could be easily affected by economic conditions. Analysis of the two cycles could provide a reference for commercial banks to decide when to tighten the credit and when to enlarge the real estate loan. Policy risk analysis will also be made in this part.In the industrial perspective, this paper will be written mainly based on what the real estate industry brings to the commercial banks. The real estate developers'behaviors show lots of abnormities which lead to obvious operational risk. And this part will bring in the partial using of MPT. This could tell us to what extent the banks asset focused on the real estate industry and if the different proportion of real estate in different banks has certain relation with their non performing loan.In the micro perspective, the real estate developer will be viewed as a special corporation and their financial statements will be analyzed to see what is happening to their ability of paying back the commercial banks'loan. Now in China, the risk of mortgage loan is low. PD and LGD are much lower than normal loan, so it becomes the most popular asset in commercial banks. But this paper reminds the banks that because the mortgage loan's maturity is much longer than the developing loan and the other kind of loan, there are also much more uncertainties during this long period. In long run, we can expect that the PD and LGD will higher than today.What this paper provides to us are as below:1. Provide a research on the whole real estate loan.2. Draw the relation between the real estate cycle and business cycle.3. Do research on policy adopted by our government since 2003, and provide some hint of how to manage this part of risk.4. Calculate the proportions of real estate loan in commercial banks, and analyze this proportions using MPT.5. Analyze the financial statements of real estate developer, and describe the risk of real estate loan based on this.