Economic Capital With The Credit Risk Management Of Commercial Bank

According to the requests of World Trade Organization, Chinese financial market will open by steps, the impact faced to state-owned commercial banks has become one of issues focused by Chinese theorists and professionals. The prevention of financial risk is the key to China's financial reform. For a long time, the state-owned commercial banks has operated its credit business with politial-based, lacked effective internal mechanisms and sound external environments and produced large-scale problem loans. Although, the state established four bad loan management company and helped CCB,CB,CBC to IPO in Hong Kong. This doesn't mean that the risk management skill of our commercial bank is good. In the face of China's entry of World Trade Organization, it becomes an urgent issue for Chinese commercial banks to take measures to prevent and mitigate credit risk and to be consistent with international practice and consolidated management principles.At the end of 2006, the Ten Group begun to implement the New Basel Accord. The New Accord is a theoretical and technical document reflected the newest research fruit of international bank community, the main objective is to assure the safety and stability of financial system. Although the new framework's focus is primarily on internationally active banks, its underlying principles are suitable for application to banks of varying level. Australia, Singapore, Kore and India etc. also announced to put the New Accord into effect. Therefore, it is very important to understand the principles underlying the New Accord and to be further familiar with the methods and trends of credit-risk management in western banks and finally construct credit risk management system gradually that is suitable for the risk characteristics of China. To this, the most essential work is how to computer the credit risk precisely. So, this paper presents and analyzes the credit management system which depends on the economic capital. This paper firstly outlines the status of credit risk management from practice and theory. Secondly, this paper introduces the standardized approach and internal ratings based approach for the calculation of credit risk capital in the New Basel Accord and discusses the applicability question of the New Accord in China. Thirdly, this paper presents the credit risk management methods and its limitations of our commercial bank in technical analysis level. And then, introduces the modern credit risk management method which is based on economic. Fourthly, due to the lack of found mental data and electronic technology, this paper suggests the distributive coefficient of economic capital as a means in transitional period. At last, this paper shows the methods and suggestions of how to perform the advanced compute of economic capital.