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Application of Credit Risk Management Model in Chinese Banks

Author

Listed:
  • Haojie Chen
  • Ng Sin Huei
  • Lew Shian Loong

Abstract

The main objective of this paper is to perform empirical analysis and research on the KMV and Zeta models, discussing whether banks in China could adopt both models in their credit risk management practices. In order to measure credit risk, the KMV model focuses on “Expected Default Probability†(EDP) that is calculated using Black-Scholes Option Pricing Formula. On the other hand, the Zeta Model focuses on determining the probability of a company going bankrupt two years prior to the event. Previous research on risk management has shown that the primary risk the banks generally face is credit risk as an increasingly greater number of banks suffer losses because of credit issues. This paper therefore aims to add to the existing literature a strong case for the relevance of both the KMV and Zeta models to be considered in the topic of banks’ credit risk management.

Suggested Citation

  • Haojie Chen & Ng Sin Huei & Lew Shian Loong, 2019. "Application of Credit Risk Management Model in Chinese Banks," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 11(1), pages 141168-1411, December.
    • Handle: RePEc:mth:ajfa88:v:11:y:2019:i:1:p:141168
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    References listed on IDEAS

    as
    1. Burgstahler, David & Jiambalvo, James & Noreen, Eric, 1989. "Changes in the probability of bankruptcy and equity value," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 207-224, July.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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