Credit risk management in the current competitive condition in the Chinese banking industry

Abstract

In recent years, it has been witnessed that a number of countries are trying to recover from a deep recession which spread widely around the world. Researchers have pointed out that the laxity of credit risk management is one of the causes of the growth in the number of non-performing loans. It is necessary, therefore, to work out a method to improve the efficiency of credit risk management. This thesis examined five large commercial banks in China and studied their credit risk management processes. This study intends to develop an up-to-date understanding of Chinese banking industry, covering some aspects of credit risk management, banking profitability and competition level using Panzar and Rosse model. The results have shown that the current competition level in Chinese banking industry is monopolistic competition. Regarding credit risk management, a set of face to face questionnaires aimed at the senior credit risk managers helped the author to analyse some existing management process in some aspect of loan decision making. Results indicated that the larger the size of the branch, the higher rate of return it generates on their investments. The rate of return is considered as an indicating factor to examine the profitability of banks. Furthermore, a discussion on banking profitability has been carried out using Augmented Dickey-Fuller test, Johansen’s co-integration test and Granger causality test. The results have shown that there is no short term relationship between capital ratio and profitability. According to trade-off theory and pecking order theory, it 6 can be understood that the capital ratio of Chinese banks, during the examined period of time, was close to the optimum capital ratio. The author hopes that the findings of empirical analysis in this work could play some part during the process of bank lending and borrowing activities and therefore reduce non-performing loans and increase the profitability.