On The Construction Of China's Commercial Banks' Internal Rating System

Credit risk is the most important risk commercial banks are facing, and has been the major reason that leads to global banking crisis. Credit risk management as a result has been the key factor that decides whether a commercial bank can survive or not. The new Basel Capital Accord focuses on supervision of the capital adequacy and credit risk control that the 1988 Basel Capital Accord emphasizes. It also proposes a new framework that consists of three pillars, that is minimum capital requirements, supervisory review of capital adequacy, and public disclosure to keep financial system stable and more efficient. One of the most innovative aspects of the New Accord is the IRB approach to credit risk, which is based on banks' internal assessments of key risk factors. It encourages banks to develop risk measurement and management methods by themselves, which not only imposes the responsibility of establishing risk management system and internal control mechanism on the banks, but also increases the flexibility of risk management.With the further opening up of China's financial markets, the biggest challenge China's commercial banks are facing in the process of internationalization is the credit risk management. China Banking Regulatory Commission announced in 2003 that the new Basel Capital Accord would be implemented in Chinese commercial banks by the "two-stage" and the "dual-track" strategy. How to study in-depth the New Accord and develop in practice an internal rating system that suits Chinese commercial banks and improves their risk management capabilities is of great significance.In this paper, the frame of credit risk management under New Basel Agreement is studied, and the difference between Chinese commercial banks' risk management system along with current internal rating system and the requirements of New Basel Capital Accord is analysed. The internal rating system under the New Accord framework for Chinese commercial banks, which is composed of the decision of rating dimensions, rating standards, and rating methods, the building of PD model, the assessment of LGD and EAD of banking assets, and the corporate governance and internal control that fits internal rating system, is designed.