Credit risk assessment approach evolution with consideration for the requirements of international regulators and national banking system features

Abstract

Since the second half of the twentieth century, the international financial stability system has acquired the significance of the national interest; the foundations of the international regulation system of banking activities have been laid. The principle of compulsory risk regulation was found fundamental in order to ensure the stability of the financial system. Credit risk is generally present in any activity of a commercial bank while running active operations and it is also the probability of the income loss by a credit organization or even registered capital decrease due to a borrower's loan payment failure or the used registered capital interest payment failure. Moreover, there has recently been a prevailing interpretation of risk as an abeyance, which might lead to a deviation from the expected result of an activity both ways. Thus, credit risk means the possibility of financial losses by a credit organization due to the failure to meet obligations by one of counterparts. It should be noted that currently, considerable losses in the Russian banking system are related to some credit risks, since the banks' loan portfolio is from 50% to 70% of assets; more than 70% is designated to the credit risk, around 15% to the market risk and just 5% to the operational risk. The applicable approach to the Russian credit risk management is significantly different from the European approach, which is described in the provisions of international regulations. The significant differences are: the choice of methods, the computational procedures and the basic ratings used. The Basel Committee on Banking Supervision, which was established in 1974, with the Bank of International Settlements in Basel (Switzerland), as a consultative and advisory body, is a key international institution, which determines the banking rules, for the leading industrialized nations. Nowadays, the number of member countries of the Basel (Basel III; Basel II/III). Committee has significantly increased; it includes 27 countries, including Russia. The main objective of the Basel Committee since its foundation till present is to draw up the joint principles of development and convergence of the national approaches in the field of banking regulation. As part of the Basel agreement, there is a generalization and standardization of the best modern banking practices. The guidance documents, which are adopted by the Committee, have officially become obligatory to all the member states, as the base conditions for the proper functioning of the international banking system. Seeing the above, it is necessary to give a closer look to the contents and development trends of the Basel approaches to the credit risk assessment with regard to Russian and global practices of its implementation