Smooth Development of Construction of ICBC Internal Rating Method Project

ICBC news spokesman represented to the reporter recently that internal rating project formally launched in 2004 is under smooth construction at present. Phase I project, Master Plan of Overall Risk Management System, has been successfully finished. During construction of the Phase I Project, ICBC analyzed current state of overall risk management in terms of company governance, credit risk, market risk, operation risk and assets liability management with reference to New Basel Capital Accord and best management practice of international advanced banks, and proposed future development plan and framework for overall risk management, achieving good effect from the project.

In addition, the spokesman disclosed that ICBC was carrying out Phase II Project of Internal Rating at present. With cooperation with internationally well-known consultancy company, ICBC will make reconstruction and improvement in terms of rating organization, rating system design and operation, rating result application and risk quantification and data collection and construction of information system according to basic requirements of internal rating method so as to meet requirements of primary method of internal rating method specified in New Basel Capital Accord by the end of 2007.

The spokesman said that for improvement of risk management, ICBC has built international rating system cored with New Basel Capital Accord in recent years and continuously pushed its development in practice, not only playing very active role in identifying and preventing credit risks but also laying solid foundation for meeting primary method of international rating method.

ICBC has built independent rating audit and monitoring mechanism. Rating personnel make progress gradually in terms of professional quality and business ability. Since 2001, with reference to domestic and foreign advanced rating standards and methods, ICBC successively formulated a set of rating measures and rules, built relatively independent and distinguished 2-dimensional rating system.

Borrower rating reflects borrower breach risk and debt rating reflects specific risk elements of borrower and transaction itself. Through years of development, ICBC, according to consistency of industry, scale and risk elements, set up 13 categories of borrower rating index system such as industry, commerce, real estate, bank and small enterprises, etc.

At the same time, with reference to international up-to-date debt rating concept, ICBC also builds 12-grade rating for middle and long-term debt rating before loan and after loan and currently makes effort to formulate overall debt rating measures. The measures will fully consider specific risks on borrowers and debts, including mortgage, refunding priority and product varieties, etc.

Different transaction of the same borrower may be at different grades of rating, respectively reflecting contract breach losses of different transactions. To guarantee considered rating factors to have division risk ability and prediction and judge ability and directness and reliability, ICBC reasonably determines risk elements and index weight for rating in combination of ICBC itself practice and with reference of domestic advanced practice experience by adopting expert judge method, principal component analysis method and lay analysis method, etc.

Statistics data of four years since implementation of ICBC rating measures show that contract breach ratio within one year corresponding to system evaluation results and audit results is rising with reduction of contract breach ration of credit rating as a rule, indicating that rating measures can make relatively correct distinction of good and bad credit customers and that rating personnel have relatively reasonable adjustment on risks and credit rating.

At the same time, powerful IT system provides good platform for rating review and approval, risk quantification and data discrimination. Due to realization of centralization of ICBC credit management system, all the rating approval processes are made through computerization, not only increasing work efficiency but also preventing operation risk to some degree.

Credit system also keeps basic customer information, financial reports and statements, materials on qualitative judge and rating results and breach records in time order for long. By so far, ICBC has already accumulated four-year customer rating data and is able to make one-year, two-year and three-year transition matrix of each credit grade, laying good data foundation for building quantized credit rating models and correctly estimating borrower's contract breach possibility (PD).

In addition, ICBC takes lead to develop financial statement audit system, which automatically audits formality, cancellation and examination relationship, important account and abnormality of financial statements to discriminate trueness of financial data and to filter false financial information before rating calculation, enabling quantitative evaluation results of credit rating to objectively reflect actual situation of customers.

ICBC news spokesman said that during construction of internal rating method project, ICBC will carry out a series projects in the fields of credit risk, market risk, operation risk, capital management and assets liability risk, etc, of which, Phase II Project, Non-retail Credit Risk Internal Rating Project is the core project of internal rating project and is the foundation of future construction of overall risk management.

Objective of the project is to build internal rating system of non-retail credit risk meeting requirements of New Basel Capital Accord and ICBC practice according to requirements of 2-dimensional rating (customer rating and debt rating) of internal rating methods of New Basel Capital Accord and with reference to best practice of risk management of international banking sector and to realize promotion and application of internal rating results in the business practice of risk limit, pricing, capital distribution, performance evaluation and portfolio management, etc.

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Basel Accord
Basel Accord is one of the international accords with the largest influence on development of international bank industry by so far. According to the latest research of international clearance bank, about 100 countries throughout the world adopt Basel Accord. Since implementation of the accord, capital sufficiency of international banking industry is obviously improved. With technology advance e and innovative financial development, great changes have taken place on risk prevention ability of commercial banks, monitoring and regulatory methods of the monitoring departments and operation modes of financial market,. To adapt the changes, Basel Committee decided to comprehensively modify the accord in 1998. The first draft of New Basel Capital Accord was issued in June 1999, followed by the second draft issued in January 2001 and finalized in 2003. The accord will be formally implemented in 2006. Compared with Basel Capital Accord in 1988, the new accord is more extensive and more complex in terms of contents and it abandons "one model of capital monitoring and management for all" and gives minimum capital requirements, external monitoring and management and market restraint of bank risks, enabling capital level to more accurately reflect bank risks. As for the minimum capital requirements, standard method and internal rating methods on credit risk management are proposed and finally transit from primary internal rating method to high-grade internal rating methods, enabling more close connection of capital sufficiency and major risks faced with bank. After issuance of the new accord, not only 10-national group and 25 EU members will implement the new accord by the end of 2006, but also Australia, Singapore and some developed countries such as South Africa, India and Russia will also take active measures to implement the new accord. It is certain that the new accord will be implemented in the global major financial market. China Bank Regulatory Commission already expressed to carry out work according to strategy of "two-step progress" and "dual-track system". As for banks meeting requirements of the new accord, monitoring and regulatory capital will be estimated according to requirements of the new capital accord.

Internal Rating Method
Internal rating method is to determine minimum capital requirements of credit risk by using internal credit rating system of the bank on condition that commercial banks meet a series of monitoring and regulatory standards specified under supervision and management authority. Internal rating method is divided into basic internal rating method and high-grade internal rating method according to complexity degree. The former must be estimated possibility of default (PD) by bank. Monitoring and regulatory authority must provide loss rate of default and risk exposure. The latter requires the bank automatically calculate PD, LGD and EAD based on the accumulated data.