Calculation Of Pledge Ratio In Commercial Banks Based On VaR Method

The NPA (non-performing asset) in China’s banking industry has beenaccumulating from1990s while the booming growth of economy. The whole industryis under the burden of rising NPL (non-performing loan) ratio. In addition, with theto be improved internal credit rating system in China, it is quite difficult to measurecredit risks. As a result, commercial banks in China tend to avoid unsecured creditload and also start to favor carrying out mortgage loan business. Stocks and realestates hold a large proportion in the pledged assets of China’s commercial banks. It isan important task for whole China’s commercial bank industry to identify and preventrisks in stocks and real estates pledged loans by analyzing pledge rates of these assets.The author reviews the research background and significance of credit risk. Thisarticle summarizes the implication of stocks and real estates pledged loan, VaR,EGARCH model, etc. The method of analyzing pledge ratio using VaR is alsoelaborated in this article. An empirical research has been carried out based on finaldaily close prices of54representational stocks and monthly prices of real estates in8different areas. For stock prices with normal distribution, VaR can be calculatedthrough expected yield and volatility estimated from EGARCH model. For real estateprices with unknown distribution, VaR can be estimated by historical simulationmethod, and further calculated the pledge ratio as used for pledge loan.The result indicate that commercial banks will face lower loan risks whilechoosing lower pledge ratio assets, but relatively with less profit. Therefore,determination of optimal pledge ratio will not only help avoiding risks, but also be aneffective method to bolster profits.