Zhang, Jiaying
(2007)
Credit Risk Management System in China Construction Bank and Application of CreditMetrics.
[Dissertation (University of Nottingham only)]
(Unpublished)
Abstract
The purpose of the dissertation is to assess the credit risk management system in China Construction Bank. Credit risk has long been a problem faced by banking industry. The emerging various financial instruments widen the sources of credit risk, which, at the same time, raise the probability and the exposure size of credit risk to banks. The recent turmoil of the US secondary mortgage market triggers a global credit squeeze. It causes not only bankruptcy of related banks, recession of the U.S housing market, but also the fluctuation of global exchange market. Bear with the severity of losses that credit risk can cause, efficient credit risk management system is vital for a bank's profitability, and competitiveness.
Due to the China economic environment, management systems of Chinese state-owned commercial banks have fallen back with those large world-wide banks. Threaten by the increase competition after open up financial market, banking reform is implemented to enhance domestic banks'credit risk management system. China Construction Bank (CCB), as the pioneer in going commercially orientated, represents the landmark and future position of performance on credit risk management in the industry level. However, the study reveals that CCB's current risk management system exist shortfalls compares with large world-wide banks. First, it lacks of strong credit culture. Single legal responsibility framework encourages the avoidance of riskier customers which against the bank's mission of maximising profits by balancing risk and returns. Second, its credit grading process involves too much subjective judgements. Lack of advance risk quantified techniques restricts the accuracy of risk measurement. Third, it bears the existence of government interference. It has not only the contribution on the bank's non-performing loans, but also the freedom in credit risk pricing. And forth, it lacks the sense of portfolio diversification.
CreditMetrics, an advance credit risk models, indicates that the current loan portfolio of CCB is under a threat of making credit losses in one year time. And it is suggests that instead of avoiding risk, mechanises as setting prioritizing risk reduction and credit limits can be used to help efficient manage of the bank's credit risk.
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