Study on the Issues of ICBC Restructuring and Listing Yu Dongzhi
This paper is a normative practical study on the issues related to ICBC restructuring and going public. Contributions from the study can be summarized in the following: 1 Elucidate in detail the restructuring experience and corporate governance of all state-owned commercial banks in China and abroad and the domestically listed banks. 2. Elucidate in detail the necessity and feasibility for ICBC to restructure and go public and the issues that may be encountered during restructuring. 3. Expound in detail the issues related to EVA performance review, incentive scheme and CEO system, as a proven example for ICBC to establish a highly-efficient governance mechanism.
Conclusion drawn from the Paper:
(1) Identify the significance of the success to reform from the purpose of restructuring and floatation of state-owned commercial banks.
(2) Market rules that have to be followed during restructuring and going public.
(3) Overhauling restructuring is the pre-requisite of successful listing.
(4) Central Government accelerates ICBC shareholding restructuring in an effort to let ICBC equity system and governance structure comply with a modern commercial bank. This is crucial to sharpen ICBC competitiveness.
(5) Overhauling restructuring meets the final objective of ICBC restructuring (complete corporate governance and changes in realizing growth). It also paves the way for ICBC to participate in international competition.
(6) Objective of corporate governance in China commercial banks should be "Maximize Shareholder Value in Long-Term".
(7) Further identify the importance of corporate governance in commercial banks based on risk management.
(8) Organic combination of performance and salary of a person-in-charge is the direction that state-owned commercial banks working in to build a highly-efficient incentive mechanism.
(9) China's state-owned commercial banks must respect history when building their own corporate governance, and should take into account their own initial status and constraint condition before choosing the right business model
(10) Capital injection is only a "propeller" to speed up state-owned commercial banks to reform, but definitely not a sufficient condition to the success of the reform. A highly-efficient, complete corporate governance structure for sustainable development should be the ultimate objective of reform.
Ideal Model and Practical Choice: Auditing by Department, by Product, by Customer in a Modern Commercial Bank Chen Xinyue
A research subject which stresses its importance based on the contractual nature of a corporate and expounds the difficulty of the themed research from the structural complexity of the inherent information, the feasibility of the research topic given the fast development of information technology. The study is imminent in light of the opening of China's banks, the restructuring of state-owned commercial banks and ICBC's fine-tuned management.
This paper states out the audit attributes by department, product and customer in terms of management accounting functions and technological changes. The theoretical research is based on the systematic study on the modular management concept, job management theory, value link analysis method and input and production model.
With respect to the increasing business scale, rich product varieties and fined-tuned internal management in a commercial bank, the paper starts from the analysis of the symmetrical relationship of the "4-in-one" (job, department, product, customer) employing modular management concept, job management theory and value link analysis method to break down the structural module of a commercial bank into an "integrated, dimensional" Operation Audit Model of a modern commercial bank. Auditing is accomplished by department, by product, by customer based on the analytical result in three areas: decomposition and identification of job, formulation of internal transfer price and choice of IT model. Further, the paper elucidates the implication of cost constraint mechanism and income incentive mechanism to a bank through this auditing model which is not physically bound by any operation department, management department, branches or subsidiaries, nor restricted by the differentiation of internal product and external product, nor difference in internal customer and external customer.
In a commercial bank, auditing by department, by product, by customer is the foundation of building a management accounting system which is main technical support to banking process reconstruction, organization restructuring, departmental incentive, product design and customer management.
Full Banking Risk Management Theory and Its Application Tang Guochu
A themed report on the study of Banking Risk Management in three aspects: theoretical principle of full risk management, industry standard and regulatory requirement of full risk management in a bank and implementation of full risk management in a bank.
Main Conclusions Drawn from the Paper:
(1) Full risk management lies in the theory of a corporate. The report disagrees that corporation is a group of contracts but considered it a recognizable entity. It also disagrees that transaction cost is the only reason that Corporate exists.
(2) Basel New Capital Agreement depicts the trend of modern risk management. This agreement of full risk text summarizes the three factors in recognizing a corporation from the development history of a corporation: transaction, marketplace and rules. A corporation in economic terms is a strategic system.
(3) The report gives a new definition on the concept of transaction cost from theory and operation. Theoretically, transaction cost is the exchange cost of ownership right. Practically, indirect cost such as operation expenses in a corporation's financial report is taken as the transaction cost. The report considers reason of a corporation's existence as to lower transaction cost, to get benefits or to divert risk.
(4) Corporation Theory postulated in the Report may serve as the theoretical principles of Full Risk Management Framework promulgated in 2004 by COSO.
(5) Full risk management in ICBC is implemented in three steps: Step 1: speed up the construction of internal rating to manage the risk of transaction. Step 2: work on portfolio risk management. Step 3: implement risk management at corporation level.
Investment Banking Development Strategy in a Commercial Bank under Dual Constraints of Regulatory and Market Peng Hui
Based on the study on the mixed operation and models choice of commercial banks from home and abroad, it is found that commercial banks always have the tendency to start investment banking services by taking the internal model of Full Banking or Mother Bank-Investment Banking Branch. Operating internally is the most effective organizational option for a commercial bank to obtain diversified and coordination advantages leveraging own resources. Under the regulatory constraints, commercial banks generally adopt the mixed model of starting investment banking services by operating internally with financial holding company. Meanwhile, the report indicated commercial banks tend to place major emphasis in developing investment banking services which best coordinates with its own services (such as merger and acquisition, restructuring, consortium loan, lending in secondary market) and easily get success in these services.
Whether diversified operation is successfully in obtaining the ideal coordination depends on if the bank is successful in cross selling between different internal services lines and if organization is highly efficient. The bank itself has to make adjustment on the organizational design to accommodate the diversified operation internally. The report states that investment banking services in securities are not in full swing under the regulatory and system defects in China's capital market. Growth in investment banking services may mainly come from non-securities type of services originated from the combination of currency market and capital market, besides current China's regulatory frameworks are in line with commercial banks to open internal non-securities type of investment banking services. Hence, it is not only viable but necessary for China's commercial banks to operate investment banking services internally. This is also a practical option for China's commercial banks to diversify given the comparative advantages of commercial banks.
Management of Liquidity Risk and Interest Rate Risk in China Commercial Banks Yang Jianlin
The themed paper analyzes the business environment of commercial banks in China and takes ICBC as the example to study the management problems of liquidity risk and interest rate risk encountered by commercial banks in China. The report postulates a new concept and methodology of measuring and managing risk with two practical options.
(1) Liquidity Risk is a general bank risk. Strengthening the management of other risks must be on the agenda of liquidity risk management
(2) Liquidity forecast is actually a predication on the growth of deposit and loan. Factors affecting the changes of deposit and loan are: trending, seasonal, periodic and ad-hoc.
(3) Calculation of sediment rate of current deposit is a mandatory item in the liquidity risk management of commercial banks in China.
(4) Contradiction between liquidity and profitability constitute the main problem of a commercial bank in its management of operation. The problem should be technically tackled by optimization of model.
(5) Currently, management of interest rate risk in China commercial banks is in the stage of "asset management". Active and limited management model should be adopted instead.
(6) Employ the concept "Period Theory" to guide the management of interest rate risk in China commercial bank.
(7) Control interest rate risk by loan pricing actually means to set the parameters for loan pricing by following the trend analysis of interest rate in order to influence the sensitivity and strength of interest rate of loan.
(8) Long-term loans in current balance sheet carry a leviathan risk in interest rate. Contracts of long-term loans should be revised as early as possible.
(9) It is not only necessary but mandatory to manage interest rate risk and liquidity risk in a coordination fashion.
Regional Allocation of Credit Resources Chen Jinming
After the introduction on economic spatial adjustment and development theory in China and international, first part of the Paper analyzes under theoretical regional economies the characteristics and problems in the spatial structure of China economy and elucidates the relationship between China population, resources and economic development. The report gives a systematic conclusion on the principle thought of China adjustment in economic spatial structure during "Eleventh Five-Year Period": "开-shaped" spatial layout framework and "7+1" economic regions from macroeconomic objective, and microscopically, screen out regions of greatest growth potential and problematic areas now and future in China.
Based on the first part, second part of the Paper analyzes the fundamental economic indexes that interpret the allocation of ICBC credit resources based on open information from State and ICBC. The Report completed the design of a general theoretical model for the allocation problems of ICBC credit resources by qualitative and quantitative analysis, choosing Anhui and Jiangxi for a selective test.
In the third part, after reviewing the allocation scale and structure of ICBC credit resources, the Paper studies the risk involved during the allocation. Using information and documentation open to public by State and all regions, the Paper gives a rational model after systematic study on the difference of risks between all China areas (regions). Results of the tests on the model indicate the model should play an active role in the actual management of financial risk. Lastly, The Paper identifies the level of ICBC exposure to asset risk during allocation of its credit resources from logical and operational approach.
Changes in China Credit Market in the next 5 Years Yi Qiulin
This research subject is the in-depth research on the trend of future changes in China credit market. Result of the research is an importance reference for China commercial banks to formulate development strategy, competition strategy, develop new credit product and increase profitability.
Given the two dynamics of financial marketization and economic marketization in China, the Report analyzes (1) the trends of future changes in China economic reform and economic development, financial reform and financial development; (2) changes of demand in credit market; (3) Changes of supply and demand in credit market, and finally the changes in credit market arising from the changes in these three areas. Details include: history of changes in China credit market, trend in changes of total demand in credit market, trend in changes of total supply and demand in credit market, trend in changes of non-balanced supply and demand in credit market, credit trend in different types of corporates, trend in changes of the direction flow of credit areas, trend in changes of direction flow of credit sector, trend in changes of short term and mid-to-long term loan, trend in changes of consumable credit, trend in changes of RMB credit and FX credit, interest rate; marketization of interest rate and its influence on credit market, non-performing loan in financial institutions, strategy of increasing credit quality of financial institutions, trend in competition among financial institutions for customers, price, product and services; trend in change of ratio occupied in credit market by different financial institutions, effect of changes in credit market on the operation efficiency of commercial bank, influence from capital market on credit market…..
Management of Operation Risk in Commercial Bank Credit Services Liu Chao
Digitized services, globalization and fast innovation made the topic of operation risk management a major concern among regulatory bodies and commercial banks in all countries. China banks are on the road to reform. Conversion of old system to new, changes in management style and restructuring of business process entail operation risk that may lead to serious loss. Given the crucial role played by lending business in China commercial banks, it will never too much to ask for putting emphasis on the management of operation risk for lending. Operation risks together with credit risks are major reasons of non-performing loans in China commercial banks. It is a mandatory requirement to accurately identify, scientifically measure and effectively control operation risk in lending in order to improve the management of China commercial bank and ensure the success of reform.
This research topic starts exactly from this practical need and attempts to effectively define, identify, measure and control the operation risk of lending. The research begins by the following logic: first, establish a feasible framework on the management of operation risk based on theoretical analysis and practical operations; next, develop an applicable methodology and model to measure operation risk and verify the model by taking advantage of the strong data management of ICBC to collect and prepare relevant data; finally, selectively build an operation risk control system for commercial lending and implement full operation risk management. Three innovations can be expected from the research: 1. an operation risk management framework with theory and practical running in parallel more readily applies to China commercial bank management. 2. Large amount of first-hand material and data is very helpful to develop a mature model and methodology to measure operation risk; 3. an operation risk control system applicable to the lending business.
Progressive Reform of China State-Owned Banks Jiang Ye
With the massive transformation of China economic and financial system as the background, the study begins from scientific approach using modern economics and financial tools to build a theoretical ground to systematically study all questions encountered during the progressive reform of China commercial banks, under the economic circumstances that state-owned banks rely on. Policy suggestions and consultancy solutions of great value will be given from strategic and operational point of view. These suggestions and solutions are significant reference to theory practitioners, decision makers and to all state-owned commercial banks.
The Paper first gives an example of China state-owned banks that reform through comparison on two different reform and transformation options- "Progressive" and "Radical", strong and weak points of different financial systems, different options of banking reform (equity reform, governance structure, market circumstance), and measures the performance in banking reform of different countries. The Paper states out the necessity that China state-owned banks must opt for progressive reform. Based on this, the Report continues to elucidate and rethinks the road of the progressive reform that China state-owned banks have passed. After diagnosis on the measures, solution logic, performance, difficult situation and the related reasons on these past reforms, the Report finds out a strategic and operational solution to tackle the above difficult situations. The Paper then gives an in-depth analysis on all aspects of the reform in China state-owned banks: system infrastructure of the reform, infrastructure system reform and other system reform. Finally, the Paper analyzes the external complementary environment for further reform of state-owned banks while the banking reform continues and the full opening of banking sector of China. Based on the above analysis, the Paper finally states the strategic direction on the reform of state-owned commercial banks is to concentrate on the finance functions fostering, and the paper also puts forward the appropriate suggestion of the operational reform.
Modeling Risk of Internal Rating Methodology Shang Jinfeng
The Report gives a forecast on the issue that academic circles and industry sectors should pay attention to: modeling risk during set-up of internal rating system, based on the practical experience of internal rating methodology in commercial banks from home and abroad.
The Report is divided into three main parts: defining modeling risk followed by an analysis on the environment produced from modeling risk in domestic implementation, including infrastructure environment, market environment, risk environment and data environment. Three ways of modeling risk aversions are then given: localization, modeling verification and risk management system set-up.
In the opinion of the Report: (1) New Capital Agreement Measurement Model has limitation since it is based on the sample data from large complex European banks. Uncertainties may come out during actual implementation in different countries. Implementation of the model is actually a self-adaptive process. Hence, while implementation of IRB law, China banks need to actively explore the most suitable implementation on account of China environment and own bank situation besides following the principle and direction of New Capital Agreement (2) Commercial banks must establish a robust scheme to verify accuracy and consistency of risk factors during verification of rating system, process and evaluation. (3) Commercial bank should combine restructuring of internal mechanism to establish business processes and organization scheme that comply with the New Capital Agreement. Internal rating system should be developed according to the dimensions, structure, standard and methods stated in the New Capital Agreement.
ICBC Investor Relations Management Xing Huiqiang
Work on investor relations is a strategic management tool to maximize the value of public company by helping investor to understand and recognize the company through full information disclosure to strengthen communication between investors and potential investors. This research subject focuses on ICBC special situation by reference the general principle and experience in investor relations. Main study on ICBC investor relations includes its special nature, concept, objective and positioning of the work, different roles played by ICBC staff, identification of ICBC investors and rationalization of its structure, creation of the system, communication options and mechanism, management of market capitalization and performance review.
Innovations expected from the study: 1. In-depth and systematic study on the work of ICBC investor relation with suggestions which are logical and strongly operable. 2. Special focus on the creation and implementation of ICBC investor relation system using a combined methodology of economics and law in order that the system is fully implemented at the right place. 3. Focus on the conflict and coordination of the different rules in capital markets of abroad and China and suggest a solution. 4. By setting up a rational performance review system to improve the work of ICBC investor relation that surpass all the other domestic banks and all listed companies and make as much of a name for itself in China banking reform.
Credit Risk Structure and its Management Li Duo
Credit risk is the main business risk in a commercial bank, it is very difficult to manage. The Paper is a normative study on credit risk from structural perspective. Contributions from the Paper can be summarized in the following: 1. Full discourse on the system properties and inherent structure of lending business, disclose the reasons and distribution of credit risks; 2. In-depth expound on the kernel risk structure and whole risk structure in a single credit loan; 3. Elucidate the formation and characteristic of three risks in credit risk structure: loan purpose, customer credit and guarantee validity; 4. Discuss on the associate relationship between credit assets and the risk involved in a lending portfolio; 5. Give the management counter-measures based on the structural nature of credit risk.
Conclusion drawn from the Paper: (1) Lending business is an open, complex macro-system. It has system properties and structural kernel; (2) Credit risk structure is the inherent reason that leads to the unique nature of credit risk. Credit risk structure refers to all the micro elements and its organization that constitutes the credit risk system. It is exactly this special and inherent structure that gives the whole properties of credit risk; (3) Loan purpose, customer credit and guarantee validity are three basic points in the credit risk structure of a single loan. Different structure displayed by credit risks is exactly because of the difference in combination of these three basic points; (4) There are three mixed associate structure in the credit risk structure of a single loan-1. 2-dimensional mixed associate structure composed of loan purpose and customer credit; 2 -2-dimensional mixed associate structure composed of loan purpose and guarantee validity; 3. 3-dimensional mixed associate structure composed of loan purpose, customer credit and guarantee validity; (5) Effective, economic credit risk management is based on the design of credit risk structure, risk management framework and risk resources allocation.
Over-Supply of Liquidity in Commercial Bank Deng Liyang
Cairns believed that balance is only an exception in an economy full of uncertainties and incomplete information. Un-balanced is the norm. After many years of short supply of commodities and capital, China becomes over-supply in some areas in recent years, especially the over supply of liquidity which is commonly seen in nowadays China. Increase in liquidity provides low-cost capital to economic development. A favorable condition created for the development of financial market. On the other side, too much liquidity under a certain condition will lead to the low-efficiency use of the capital. This will heat up the market, create economic bubble and become the seed for crisis. To a commercial bank, large amount of capital provides favorable conditions for managing capital in scale and developing business. On the flip side of the equation cost of operation will increase if large amount of capital is taken in without finding an effective use of the funds. This creates loss and deviates from the business objectives.
As a developing country, China basically should be lack of capital. Over supply of liquidity in China must imply a special economic logic. Over the years, target of observation in main economic circles are market economy developed countries where the focus is on the formation and transmission of price signals under balanced situation. Not much attention is paid on the incomplete, un-balanced economy in developing countries, in particular the over supply of liquidity in developing countries with economy transformation. Based on the characteristics of China liquidity nowadays, this Paper aims to explore the special reason and economy mechanism in China as a developing country that lacks of capital and postulate the strategic direction for commercial bank to change. Preliminary study indicates that current over-supply of liquidity has a characteristics of "Frictional Over-Supply". The formation is rooted in the unbalanced entity economy, mis-matched development between banking, social system and entity economy. All these reasons are shaped under the great environment of a developing country during strategic economy transformation, backwardness of financial development, mis-matched development between international currency system and international division-of-labor (economy). To solve the frictional over-supply of liquidity has to rely on the provision of financial functions that adapted to the economic development. Over-supply of liquidity in commercial bank is a total reflection of China over-supply of liquidity because of the absolute ratio of indirect financing occupied in China investment system and the special economic and financial structure of China. The Paper aims to find a solution from the perspective of a commercial bank and explore the strategic transformation issues against the background of over-supply of liquidity in commercial bank.
ICBC Consolidated Operation Niu Xiaoying
The study mainly includes four parts. First Part is the Background. It states out the meaning and objective of the research topic, background on the banking development in overseas and China, theoretical principles and research bibliography. Second Part is the Reference. Citicorp, Deutsch Bank, HSBC and Korea Kookmin Bank are taken as reference for ICBC by studying their history of transformation, external regulatory environment during transformation, strategy in consolidation, interoperability and fusion of services, changes in organization structure and the handling of conflict of interests and risk control. Third Part is the Strategy. It explores the choice of model and strategic measures should be taken when ICBC moves to consolidated operation. Strategic measures of near-term, mid-term and long-term are postulated, such as through mergers and acquisitions, launch securities and insurance services through cooperation or internal development. Analysis is also given on how to make use of the advantages in customer resources, information resources and traditional platform to develop fully-coordinated and range economy banking services, such as fusion of bank and securities services, fusion of bank and insurance services. Finally, analysis is given on all kinds of risks involved referencing the risk management experience in overseas financial institutions with suggestions on the choice of ICBC risk management model and system creation. Fourth Part is the Prospect. It covers the conflict of interest, development scale, regulatory environment and market environment that may be encountered after ICBC changes to consolidated operation.
ICBC Development Strategy for the Northeast RegionLiu Zhiguo
Rejuvenation of Northeast China is a catalyst to the rapid economic growth there, bringing more opportunities to ICBC. However, ICBC’s branches in northeast China face numerous constraints. External factors are the limited room for growth behind the lagging regional economy and credit environment, market got narrowed by financial disintermediation and competition from peers and unsustainable development because of unreasonable income sources. Internally, the rigid control on the risk cost brought by the non-performing loans in the past, staff initiatives hampered by unreasonable mechanism, incentive scheme, low production efficiency as a result of unjustified fees, improper credit management leading to sub-standard services, and reform and innovation moving slowly under ineffective management.
First of all, a solid foundation is necessary for ICBC branches in northeast China to grow steadily and independently to reach the average level among all branches. Next step is to upgrade and become a new growth pole of ICBC. Key agenda at this point of time is to focus on personal banking, intermediary business, and hold on to be the No.1 retail bank in the Northeast; step up the efforts to improve credit management and risk management; raise the core competence of corporate banking; keep close watch on the top clients with good potential and look for new customers. To start with, Head Office should place strong support on branches in ten large and mid-range cities; concentrate on dealing with the history bad debts and improving assets quality; adjust the policy for lending to new clients; encourage the exchange of staff and business cooperation between branches in Northeast China and branches in developed region; make necessary adjustment on the service income from corporate group customers. The above measures are new drives for branches in Northeast China to start the "last jump".
A Data Mining Approach to Performance Evaluation by Customers in Commercial Banks Xu Chengxing
The report mainly studies the financial performance evaluation by customers, non-financial performance evaluation, future performance evaluation and performance evaluation on customer managers in commercial banks. There are four main conclusions:
(1) New model for the calculation of customers’ expense cost. The model presented in the report takes into account the accounting system and IT processing capacity in nowadays commercial banks, as well as the "progressive" characteristics of the financial services offered to different types of customers. The model facilitates commercial banks to calculate the marginal income from key customers, and reflects the advanced theory of Activity-Based Costing. (2) Design an index scheme for non-financial performance evaluation and employ grey evaluation method. The report starts from former research and postulates that non-financial performance evaluation mainly involves two areas of market performance and relation performance. An index scheme is designed for the purpose. The report considers that financial evaluation is a result of customer evaluation, while market performance and relation performance reflect the creation process of customer performance, and three of them reflect the performance of customers. In view of the incompleteness and fuzziness of the information during index evaluation, the report employs grey system theory and fuzzy mathematics in an effort to reflect the performance of customers scientifically. (3) Use data mining to evaluate the future performance of customers and start empirical study. First of all, the report conducts theoretical analysis on the future performance of customers, and then uses the credit card data of a commercial bank to build logistic regression model, decision-tree model, neural network model and combined model. Next step is to perform comparative analysis on the performances of these four models. Last step is to use data to verify the four models. The result shows that use of data mining to evaluate future performance of customers has good forecast quality. The performances of the four models are similar, yet relatively speaking, combined model is better. (4) Suggest the use of responsibility EVA of customer managers to evaluate the performance of customer managers. The report employs fuzzy hierarchical analysis to evaluate the responsibility EVA of customer manager. The model used in the report identifies more accurately the responsibility, right, benefit of a customer manager and effectively avoids using customer performance directly as the base to evaluate the performance of customer managers. The model addresses the long-time problem in commercial banks that it is difficult to evaluate the performance of customer managers.
Verification, Problems and Improvements in Customer Credit Rating Model Using ICBC Internal Ratings-Based Approach Chen Yang
The report studies the probability of default (PD) model in measuring credit risk of non-retail banking customers by ICBC Internal Ratings-Based Approach. Six years of data (2003-2008) are used to evaluate the quantitative model from theoretical and statistical point of view, focusing on the identification, accuracy, stability, conditions for building the model and the development process. Special study on the technical details of the model and suggestions are given on the optimization.
Main conclusions are: (1) Statistical methods (AR value tests, ROC value tests, K-S testing) are employed to test the identification function of the model. Results show the strong identification and good performance of ICBC's four PD models, which meets the industry requirements. The models can be used in production. (2) Use of quantitative testing and qualitative testing on the assumptions of the model and model-building process to perform independent test, significant test, non-significant test, non-additive test and standard stability test. Results show that the model method is well-suited, and model-building process is complete and reasonable. (3) Further analysis on the technical details of model-building process with emphasis on the credit cycle correctness, sample ratio, matching between loan term and default surveillance window, estimation of related parameters. Suggestions on optimization are given. (4) The report suggests setting up a job position to test the model for completeness and testing of critical points in order to build a standard evaluation system.
On the Construction of RMB Yield Curve and Pricing of Interest Rate Structural Derivative Hu Xinhua
This report first specifies the basic conceptions of several interest rates and their relations. By deeply studying the fitting methods for static yield curve and the theories for term structure of dynamic interest rate, and by combining the actual condition on current RMB interest rate market, it proposes that commercial banks should not only obtain a static yield curve (mainly for external supervision and internal estimation comparison) but also develop internal dynamic yield curve model (for product pricing and internal risk management). With the property of mean regression and the advantage in easy realization, Hull-White model is more suitable to construct RMB dynamic yield curve. The report studies in detail the construction process of Hull-White trinomial tree, the calibration method of Hull-White model and the application in RMB market detail. It then studies the construction method for simultaneous appearance of Hull-White trinomial tree in interest rate curve of two currencies, and explores the condition on spreading Hull-White model to multi-factor model.
Secondly, this report mainly studies general pricing process of structural derivatives, and realizes the pricing method, model and algorithm of Bermuda option and Quanto products through C++ code. Finally, it makes some suggestions for commercial banks to strengthen the ability of independent pricing and improve the level of risk management. Commercial banks could participate in RMB derivatives transaction (especially dealer transaction) only at the prerequisite of independent pricing and research ability, which concerns the discourse right of Chinese commercial banks on RMB derivatives market. Chinese banks started very late in the field of derivatives transaction. Thus, it is an actual choice for realizing pricing ability and risk management to introduce external pricing software, build modernized transaction platform, establish rational internal transaction system and mechanism for risk control, accounting and capital clearing, improve transaction level, and then gradually develop independently on this basis.
Case Study on Various Models for Loan Transactions and Establishment of Loan Market Xie Gang
Firstly, this report systematically studies international products and market of loan transaction in terms of theoretic analysis and practical operation. Second, according to ICBC regulations on the transfer and transaction business of syndicated assets and other relevant laws/regulations, and by ICBC actual demand for launching loan transaction business, it designs five main models for the transfer and transaction business of syndicated assets suitable for current stage (i.e. unilateral buyout, financing connection, bilateral transaction, separable transaction, and conversion at the right opportunity). Then, by referring to the foreign products of loan transaction and the latest achievement of financial innovative development and based on the innovation of investment banking business, it designs 7 perspective innovative loan transaction products, i.e. loan renewal, loan transfer, loan participation, loan default swap, loan forward transaction, loan option transaction and loan portfolio transaction (consolidated, composite).
This report preliminarily proposes innovative concept for construction of Chinese loan transaction market, i.e. construct a national central OTC market of clear transaction process and under full supervision of regulatory institutions by building a Tianjin OTC market, and centralize current loan transaction scattered among commercial banks compulsorily via administrative measures/industrial organization or through various polices (tax preference). Such centralization not only realizes the innovation of commercial banks in the mechanism for credit risk management innovation, but also strengthens supervision and control risk through central transaction. In its viewpoint, it is very strategically significant to catch the historical opportunity of setting up OTC market in Tianjin and for ICBC to take the leading role. This is a latest move of developing OTC products and market after financial crisis to centralize and supervise the trading of scattered OTC products.
Regional and Business Strategy of ICBC Globalization Zhang Hongjun
It has become a recent focus of ICBC to advance globalization strategy, whose key lies in overseas presence and business positioning. First, this report studies the motive for ICBC globalization in theoretic terms and the choice of globalization strategy. Second, it analyzes the development process of overseas business in three banks of different globalization level (i.e. HSBC, Standard Chartered Bank and Bank of China). Finally, it mainly explores the regional and business strategy for ICBC globalization, proposes for the planning and execution of ICBC objectives of globalization by reviewing the development process of ICBC globalization, and analyzes in detail ICBC regional positioning and business development direction.
In terms of ICBC's global presence, this report proposes to escalate overseas institutions in Brazil, Argentina and India through various methods (e.g. Acquisition, new set up): establish a business network with branches in each continent and all international financial centers, strengthen the presence in emerging markets/regions (e.g. Asian-Pacific) , increase the number of secondary branches in them, form a global network covering the local and surrounding markets, further strengthen the role of branches in international financial centers, and specify the role and operation objectives of existing oversea branches. In terms of regional management for ICBC globalization, it stresses the concept of "unify strategic objective of whole bank, and centralize global management", proposes horizontal regional management in global branches, and considers the establishment of three major regional management centers (i.e. Asian-Pacific, Europe and America). In terms of business expansion for ICBC globalization, it proposes to fully utilize local advantages, realize the integrated development of domestic business, realize the differential development of overseas business, improve the localization in overseas subsidiaries, gradually build comprehensive operation platform of mainly commercial bank business. In terms of management in overseas business, it proposes to strengthen the centralized management of global business by head office, fully display the effect of scale and synergism from global business network, gradually transform from traditional orientation on regional management to matrix management by integrating the management of region, business and customers, and overall advanced centralized management.
RMB Interest Rate Derivatives Market and Innovation Yu Jinyou
According to Chinese market-based reform of interest rate and actual background of market development for inter-bank interest rate derivatives, this report mainly selects RMB interest rate derivatives, and deeply studies in several aspects (e.g. market and innovation of RMB interest rate derivatives). In terms of RMB interest rate derivatives market, this report briefly reviews the establishment background, market layer and product layer of RMB interest rate derivatives market, describes the significance and urgency for China to develop RMB interest rate derivatives market by comparing it in China and USA. The report mainly describes the basic framework of RMB interest rate derivatives market, and proposes commercial banks to bear relevant responsibility and take relevant measures for various issues (e.g. market cultivation, market demand, internal framework, product design, and risk control). Through empirical analysis via measuring model, this report also verifies the leading role of 7d-REPO and its swap interest rate in interest rate swap market, and obtains the linear relation between swap interest rates. In terms of innovation on RMB interest rate derivative, this report systematically analyzes theoretical basis and actual choice of RMB basic interest rate option products, proposes a basket of solution and draws conclusion on the innovation of RMB basic interest rate option products, and analyzes/discusses the application examples and innovation of RMB interest rate swap based on customized demand. Main work and conclusion: it specifies the overall concept of Black model for pricing RMB basic interest rate option products and correcting the pricing via auxiliary LMM model; compares through empirical several basic construction methods for swap interest rate curve; builds a database on the upper/lower limit of interest rate and the historic fluctuation ratio of interest rate swap option by utilizing the fluctuation ratio of swap interest rate and forward swap interest rate; under Black framework; provides Greek’s mathematical expressions of interest rate option and the rules for their change with expiry date and target assets price; shows by a hedge empirical test on interest rate option that term Swap Delta hedge strategy is overall optimal; shows that option market should break through from retailing business to gradually foster the development concept of institutional client demand, banks' internal demand and RMB interest rate option products market; provides based on customer demand the transaction strategy and structure for RMB interest rate swap products; proposes the hedge concept of regarding correlation coefficient as the hedging ratio of open DV01 for both swap sides of bond and interest rate; and suggests term level for Spread between loan interest rate swap and deposit interest rate swap.
On the Development of ICBC Private Banking Ye Fei
By reviewing the development status and experience of domestic and international private banking business, this report studies the development problems of ICBC private banking business in terms of business model and in the logical order of describing, evaluating and optimizing business model. By analyzing various elements of business model, this report summarizes the profit logic of ICBC private banking into two levels: first, assist customers in completing assets allocation, create value for customers through assets utilization, and charge product sales fee and management fee; and secondly, provide solutions to customers according to customized demand, organize their execution, and charge consulting fee. This report evaluates the business model of ICBC private banking through SWOT analysis. Strength (S): effectively display synergic effect, and fully utilize open product framework; Weakness (W): no key skills for assets management and low efficiency of assets utilization, i.e. low adjusted gross margin (AGM) of assets management caused by limited policy environment, unable participation in assets management of some customers, unreasonable assets allocation of some customers, low or even no profit of some products, and weak investment research ability; Opportunity (O): rapidly-growing number of domestic rich population and preferential supervision policies for private banking business; and Threat (T): intensive competition in the same field and fluctuated economic cycle. This report proposes three optimization strategies for the business model of ICBC private banking. SO strategy: a growth strategy by combining strength and opportunity, i.e. Private Banking Dept. coordinates with relevant departments (e.g. Corporate Business Dept.) to establish the professional service system for main customer groups of an enterprise based on enterprise’s life cycle. WO strategy: a reversion strategy by combining weakness and opportunity, i.e. regard AGM improvement as one of development objectives for asset management business; establish a simple allocation framework of private customer assets, adjust the allocation structure of stock assets and realize the fund operation of some products in short term; construct complete asset management platform (including investment research, transaction and risk control) and grasp key skills for assets management in medium and long-term. WT strategy: a defensive strategy by combining weakness and threat, i.e. make breakthrough in alternative investment and seek for product differentiation.
Relation between Legal Risk and Compliance Risk in Commercial Banks and Control Mechanism Zhou Hui
This report mainly studies legal risk and compliance risk of banks, so as to provide decision reference for Chinese commercial banks to establish and improve the control mechanism of legal risk and compliance risk. It overall surveys the origin and evolution of legal risk and compliance risk in commercial banks, introduces the development process and management practice of compliance work, reviews the evolution of legislation in banking industry, closely tracks the latest movement of financial supervision reform, and deeply analyzes major legal risk and compliance risk for Chinese commercial banks during post-crisis era by considering the development strategies of Chinese commercial banks. This report compares and surveys the practice of international large banks in control management of legal risk and compliance risk. The breakout of financial crisis proves again the significance of risk control and management for banks. In this crisis, the risk management level of international banks also endures an overall baptism and trial. Many international banks expose a series of serious compliance problems, and encounters unprecedented supervision survey and lawsuit dispute. During post-crisis era, international banks jointly decide to strengthen the control management of legal risk and compliance risk. Finally, by referring to the experience and lessons of international banks and by considering the development strategies and actual background of Chinese commercial banks, this report proposes that Chinese commercial banks should construct a systematic control mechanism for legal risk and compliance risk through various measures so as to ensure safe operation and sustainable development of commercial banks, e.g. improve the control system of legal risk and compliance risk, establish legal risk management committee, build chief legal advisor system, establish the group framework for control management of legal risk and compliance risk, and deepen special compliance work. Such system enables Chinese commercial banks to solve major compliance problems, and thus is of a certain innovation and actual significance.
Foreign Banks in China (1845-1949） Jiang Lichang
This report systematically, overall, deeply studies the activity history of foreign-funded banks in modern China from three aspects. First according to main characteristics of different periods, it systematically surveys the activity evolution of foreign-funded banks in modern China; second, by combining typical case, it deeply explores the organization management and business activity of foreign-funded banks in modern China; and finally, it overall analyzes the complex relation between foreign-funded banks and currency system finance in modern China. This report shows many historical activity characteristics of foreign-funded banks in modern China: (1) due to Sino-foreign unequal treaties and concession system, foreign-funded banks enjoyed extraterritoriality in modern China; they were mainly governed by their home countries, and their activities were closely linked with governmental force of their home countries. Foreign-funded banks and their home countries shared both prosperity and decline. (2) According to the closeness of relation with government of home countries, foreign-funded banks in modern China could be roughly divided into two systems: (i.e. British-American system, and German-Japanese-French system). Foreign-funded banks of different systems were different in organization overview and activity condition, mainly due to different financial system in different countries. (3) The relation between foreign-funded banks and economic society in modern China reflected to a certain extent the general rules for localization of foreign financial institutions. In the viewpoint of this report, the activities of foreign-funded banks in modern China should be evaluated objectively historically through the materialistic conception of history by overall analyzing from different angles or layers. First, in terms of financial sovereignty, the activities of foreign-funded banks in modern China coordinated with the colonial expansion policies of western countries, and seriously infringed Chinese financial sovereignty. Second, in terms of financial system development/evolution, foreign-funded banks came from different countries (especially western developed countries), and were governed by financial regulations of these countries. In modern China, Chinese and foreign financial institutions coexisted to reflect the convergence of different financial systems/cultures; they not only conflicted and competed each other, but also learned/drew experience from each other and grew mutually.
Market Risk (VaR ) in Commercial Banks Wang Dong
This report mainly evaluates the market risk (VaR) of commercial banks. It deeply analyzes theoretically and empirically the selection of VaR model and setting of various parameters for ICBC independent development system of market risk. The measuring of market risk not only is the basic requirement for international bank industry based on Basel Accord, but also a requirement of China Banking Regulatory Commission for Chinese large banks. Due to limited transaction scope and late development in modern risk management, Chinese banking industry is still at the infant stage of market risk management. As one of world's largest and most profitable banks, ICBC launched China's first independently-developed market risk management system, so as to foster the key competitiveness of world first-class banks.
First, this report explores the characteristics of various VaR models. In terms of measuring contribution, it first evaluates VaR value through multi-variable mixed copula function, and compares several methods in terms of risk measuring and capital demand (i.e. traditional historical simulation, variance-covariance analysis and Monte Carlo method). In terms of application contribution, it reveals that risk management and capital measuring concludes differently in model selection. Second, it studies the influence of various important VaR parameters on risk measuring and capital demand (e.g. confidence level, holding duration, sample size, and weight). As shown by empirical analysis, the parameters in current ICBC system is most suitable for ICBC current condition and capital measuring in market risk management.
Modeling and Methodology on the Competitiveness of Commercial Banks Wan Qian
This report studies the evaluation method and evolution of commercial bank competitiveness. By summarizing and improving the existing evaluation models of competitiveness, it studies the construction and application method of competitiveness evaluation model for Chinese commercial bank. In terms of theoretic model/methodology, comparative application and case study/summary, it also analyzes the competitiveness of commercial banks. In terms of theoretic model and methodology, it makes comparative study to explore the construction results and application value of competitiveness evaluation model through various methods, e.g. factor analysis, structural equation model (SEM) and analytic hierarchy process (AHP). In terms of comparative application, it studies and analyzes the sampling data (i.e. 21 international and domestic commercial banks and 120 primary branches of four Chinese major state-owned commercial banks during 2006~2009), compares the competitiveness of commercial banks from three layers (i.e. competitiveness of domestic bank, competitiveness of international bank, and regional competitiveness of commercial banks), and systematically explores the composition and rank of comprehensive competitiveness of commercial banks according to micro-operation state and macro-strategy. In terms of case study, it summarizes the competitiveness evolution of commercial bank in developed countries and emerging developing countries (e.g. China), deeply studies that of (e.g. CitiGroup, Bank of Tokyo-Mitsubishi UFJ, and Banco Santander), and explores the influencing factors and mechanism for commercial bank competitiveness. In the viewpoint of this report, in order to realize the sustainable development and rapid improvement of competitiveness, ICBC should fully draw the development experience and lessons of commercial banks in subprime crisis. In terms of strategic choice and business development, ICBC should keep good running of traditional deposit/loan business, and maintain market-leading position. ICBC should do well in many fields, i.e. regard risk management as an important operation management strategy; manage market value and fully utilize capital market; stress goodwill and strive to improve various rating scores; specifically make competition strategy through various quantitative analytic methods (e.g. cluster analysis); and actively adjust competitiveness structure and continuously optimize/improve comprehensive competitiveness according to the requirements of market environment and competitiveness development.
Information Technology Risk Management in Commercial Banks Yang Tao
First, this report reviews the theory for evaluation and control of IT risk in commercial banks, and summarizes its composition and mechanism. Second, according to Guidance on Controlling IT risk in commercial banks, ICBC Regulations on IT Risk and other relevant laws/regulations, and by considering ICBC actual requirements for IT service, it designs an evaluation/improvement model for IT risk based on Operationally Critical Threat, Asset, and Vulnerability Evaluation (OCTAVE), classifies rating index into 9 fields through this model (i.e. IT governance, IT risk management, information security, project management, application development, testing management, operation management, business continuity management, third-party/outsourcing management), and verifies the effectiveness of this model through empirical study. This report also explores the quantization of IT risk. Through VaR and CVaR models/methodology, it simulates threat frequency through Poisson and normal distribution, measures IT risk, analyzes models, methodology, venture capital decision balance through measuring examples, and verifies the applicability of models. IT risk is prevented mainly not through technology but through system. Finally, it analyzes current conditions and problems of commercial banks in IT risk management, and provides ICBC with specific measures for IT risk management in three fields (i.e. production operation risk, application research risk, and information security risk). Main conclusions: (1) propose three main points of IT risk in ICBC by reviewing those in commercial banks (i.e. production operation, application research, and information security). (2) make empirical study on four fields of ICBC Data Center (Beijing) through IT risk evaluation/improvement model, and overall cover the risk points in these four fields (i.e. project management, business continuity management, third-party/outsourcing, and application development). As shown by this evaluation, ICBC Data Center (Beijing) is in good general state and not of moderate or high risk in these four fields, and this evaluation method is proven effective. (3) Propose specific measures of risk management in three fields (i.e. production operation, application research and information security).
Institutional Changes of ICBC Li Luxia
Rules and regulations are now the key drivers of reform in commercial banks. To summarize the roadmap, result and changes in ICBC's rules and regulations for the past three decades from the perspective of institutional economics can serve two purposes: a clear picture on the progress and reform of ICBC since its establishment and a blueprint to lay down the development path of the Bank in days ahead. Meanwhile, the process and reasons behind the changes also reflect the general rule of the changes in China's state-owned commercial banks. From the theoretical approach to summarize and look at the future, the paper presents an expanded model. The model includes rules and regulations for property ownership, as well as rules and regulations for organization structure, information system, management rules, internal control scheme and corporate culture. The paper continues to present the GIP analysis for the changes. G - Government value, I - institutional arrangement, P - performance. Based on GIP and the expanded model, the paper makes a systematic summary on the course of change in different periods (banks under government, state-owned commercial banks, restructuring and later reform periods). The paper gives a full review on the performance and relation to the institutional changes from macro / micro perspective, the interpretation on the critical issues using institutional economic theories and discussion. Based on the analysis in each phase, the paper concludes the features of institutional changes of state-owned banks reflected by its reform and ICBC unique model. At the end, the paper gives forward-looking analysis and strategic opinions on the general trend of reform and progress in state-owned banks during the post-crisis era, and the roadmap of ICBC's business transformation.
The paper draws the following conclusions: (1) common points in the institutional changes of China's state-owned commercial banks: a dynamic change of government function, path-dependence is inevitable, institutional changes in the operation are inductive instead of compulsory and Implementing "plan in phases" is important for institutional changes in state-owned banks. (2) The "ICBC model" of institutional changes in state-owned banks can be summarized as: nurture the core competency of "ICBC information technology". Critical conditions for the smooth institutional changes of ICBC is screening and training. In other competitive areas of ICBC, the "stability" of ICBC's institutional changes is reflected in the institutional changes in later periods. (3) During the post-crisis era. China is actively exploring a model for state-owned banks different from the Western countries’ "multi-ownership". New changes in international financial reform and new economic trend in China and overseas as drivers for China's financial reform will cause major impact to the institutional reform of state-owned banks. (4) Wile sticking to "ICBC model", ICBC's institutional changes in days ahead should focus on the governance structure of a modern commercial bank, the new challenges brought by the changes in organization structure for international and integrated operation, innovation on management scheme, institutional changes on internal control and IT system.
Global Management Model in Multinational Banks Liu Mingkun
Multinational banks have good global management and model. Their experience serves as good reference for ICBC to build its international presence. In theoretical analysis, the report pointed out that multinational banks should strike a balance between global business and local operation in line with its market environment and business strategy. In empirical analysis, the report presented the organizational structure, regional management, performance evaluation and incentive scheme, human resources management, localization management, risk management and crisis measures of HSBC, Citibank, Deutsche Bank and other three multinational banks, based on the interviews with the banks and second-hand information. A conclusion was drawn on their overall organization models and global branch management models.
In application, the reports used SWOT to analyse the real situation that ICBC has to face when conducting business across national borders, and the common and special points when compared against other multinational banks. A detail analysis was given on ICBC's global management for its expansion covering organization structure, regional management, consolidated management, management on different types of subsidiaries, performance evaluation and incentive mechanism, human resources management and IT system. The report ended with a forecast on the growth of banks during post-crisis era and the insight to banks on multinational operation.
The report considered that ICBC has set up its initial global management system. However, due to the unbalanced growth between domestic and overseas subsidiaries, ICBC lacks multinational management experience marked by its extensive management on its overseas subsidiaries. With a growth history different from multinational peers and under different systems and at different stages of globalization, ICBC should not simply copy the international experience. Instead, ICBC should fully into account its own situation to establish an organizational structure and implement regional management in stages and steps. Under Head Office control and differential management, the goal is to generate maximum return for the Group. Incentive mechanism and risk management system should be in place to ensure risk control is appropriate for the businesses. An International team who understand cultural issues well enough is the key to grow and manage international business.
Internal Control Audit in Publicly Traded Banks He Xiaoyang
The report studied the internal control audit of publicly traded banks in China in the face of recently announced "Internal Control System of China". ICBC's Internal Audit Bureau is referenced to implement internal control audit in publicly traded banks through different approaches of theoretical model and methodology, questionnaire survey and case studies.
The report started from the theoretical concept on internal control audit, evidences, the relation between internal and external audit control and value measurement. Based on the questionnaire responses and visits to all publicly traded banks in China, the report gave a picture about internal audit control in publicly traded banks and summarized the economic result. A closer look was also given on the successful and unsuccessful case studies and the experience of banks in China on their implementation of internal control audit during transformation period. The report made an attempt to build an application framework for the implementation of internal control audit in Chinese listed banks based on several factors: audit entity, audit objectives, audit content, audit standard, audit method, audit process and audit result. The conclusion of the report is a statement of ICBC's practices in internal control audit and the direction of internal control audit in the future. Major focuses in this report were internal control audit theory, value measurement model, application scheme, audit standard, accreditation standard for deficiency level, technology for critical control identification and risk evaluation technology. The report stated out the author's innovative theoretical evidence and methodology. At this stage, ICBC is undergoing business transformation and credit structure adjustment, moving faster in going global and integrated operation. Internal audit departments should be well-prepared to allocate the right resources, use the right mode, expand audit areas and embrace new audit technology. They should act as the third defence of risk management and the "think-tank" for ICBC governance and management.
Current Status and Future Direction of Budget Management in Modern Commercial Banks Wang Jian
The report studied the budget management in commercial banks with in-depth studies on the theories and practices through different standard approaches of document research, comparative study and summary interpreting. Experience research methods, panel data and chronological data were used to test the factors related to the setting of commercial bank's critical indices (size of new credit, income from intermediary business, business fees) and the degree of influence. Through case studies, the report analysed the current status of ICBC's budget management with a statement on its future direction.
First, the report clarified from different perspectives the theory and practices of budget management, the theoretical basis in commercial banks and the best practice standard. Second, the report stated the budget management framework of commercial banks, which included three aspects of budget management: context, fundamental support and extension. The framework should be served as reference for commercial banks to establish and streamline its budget management. Third, based on the framework, the report studied the preparation, execution, control and evaluation of budget in commercial banks, instead of separating from the commercial banks as in current budget management study.
The report truly reflected the budget management feature in commercial banks by studying in detail the important and difficult issues: preparation of budget accountability system, budget critical indices, budget preparation from different dimensions, and steps involved budget execution and control (authorization by level, necessary adjustment, dynamic monitoring, budget evaluation).
The study on the setting of critical budget indices supports commercial banks to prepare budget under uncertain conditions. The report concluded with a prospect on the future drawing reference from the case study on ICBC budget management. From the findings, the context of ICBC budget management is highly matched with the extension with very good result. Further afield, ICBC should refine its budget management on top of its existing framework.
Legal Issues and Legal Risk Control of Integrated Operation in Commercial Banks Li Jianghong
The report studied the legal issues and legal risks of integrated operation in commercial banks. Based on the comparison of legislative process in USA, Japan, Germany, United Kingdom and EU countries, the report reviewed the legislative process and real practices of integrated operation in China's banks, followed by a systemic overview on the internal and external legal issues and risks of commercial banks under the group framework. Five integrated services of commercial banks were used as reference.
According to the detail study on the legal framework of financial firms/corporations in China and overseas, the report categorized the legal issues and legal risks from two perspectives: structure and behavior. The focus was in three areas: capital transfer, information transfer and staff transfer. On the external legal issues, the report analysed the new type of external legal risks and the control in a bank under integrated operation, referencing the current regulatory status, the cooperation between banks and non-banking institution and the protection of interest of customers (consumers).
Given the wide scope of integrated operation in a bank, the report selected 5 typical integrated services (custody, wealth management, factoring, financial leasing and account services) and presented the legal issues and legal risks, combining the legal reviews by commercial banks.
The report pointed out that significant difference existed between banks in China and banks in US/Europe regarding integrated operation. The main differences were: integration process of commercial banks driven by regulatory policies, policy pilots and legislative confirmation, and cross-over between institutional supervision and functional supervision. Commercial banks usually try to get as much licenses as possible during expansion, which is a result of scarcity under pilot system supply and fierce competition among commercial banks. However, consider the State legislative policy to the financial corporations and the legal system of other countries targeted at financial companies, high concern should be given to the real and potential legal risks faced by commercial banks when entering an unfamiliar business area.
Transformation of Corporate Finance Service in Commercial Banks Bi Yi
The report used EVA (Economic Value-Added) and RAROC (Risk-Adjusted Return on Capital) and studied the transformation of corporate finance service in commercial banks from five dimensions: theoretical modeling, empirical test, experience of other banks, path design and business practices. In theoretical modeling, value chain theory, information economics, EVA were used to compare and analyze the driving factors of value creation in corporate finance service. In empirical test, the report started from the 2000-2010 financial data of commercial banks at home and abroad and analyzed the relations between their value creation capability, governance structure, capital structure and business portfolio. Quantitative methods were used to screen out the major factors that affect their capability to create value.
In drawing the experience of other banks, the report reviewed the transformation of corporate finance service in commercial banks in developed countries (Europe, USA, Japan) and commercial banks in emerging and developing countries including China. The report also made an in-depth analysis on the development and change of corporate finance service in international commercial banks (Citibank, HSBC, Deutsche Bank, Standard Chartered Bank) with a focus on the factors and mechanisms, supplemented by case studies and the result of theoretical modeling and empirical test. In path design, the report referenced the current performance of ICBC's corporate finance service and used cutting-edge theory to design a high-income, low-capital transformation path, bearing in mind the objective of achieving optimal customer portfolio. In business practices, the report cross-referenced the practices and transformation path of ICBC's corporate finance service and used the data to test the feasibility and validity of transformation. Suggestions were also given for next practical steps.
The report concluded that for ICBC to transform and grow its corporate finance service, the following five areas should be involved: 1. ICBC should draw the similar experiences from banks in China and overseas. Adjust the loan structure referencing EVA and RAROC. Focus on the conventional deposit/loan businesses to maintain its leading market position. 2. Estimation on economic capital to allocate and manage economic capital. 3 Credit rating to large, mid-sized and small enterprises, with priority on small-and-medium enterprises, use of large companies' credit for credit enhancement to small-and-medium enterprises so that one method is used to rate all companies of all sizes. 4. Use of Copula method to analyse the association and replacement of corporate finance product, design solutions with high-income, low-capital functions according to the risk appetite of the customers under a competitive product strategy. 5. Use of cutting-edge theory to line up marketing and promotion of corporate finance services in line with the market conditions and growth in order to increase competitiveness.
Management Framework of Industrial and Commercial Bank Group - Business Collaboration Liu Yang ICBC Group is moving by leaps and bounds towards the goal of being a world-class financial firm. Full synergies for the Group’s business are still in the early stage. Amid changing landscape in domestic market, competition and the rapid progress of the reform in the financial industry, in particular the globalization of banks, ICBC Group needs to move the Group's business to the strategic level.
The report started with the background and theory of business collaboration. Drawing upon experience both at home and abroad, the report designed mechanism for ICBC to achieve business collaboration according to current status, including: (1) customer-centric, customers should be at the core, shared by middle-office and back-office, customers and core business decide organization management. (2) Integration of information resources, IT strategy and business strategy should be combined for the Group's operation. (3) Integration of marketing channels to achieve business collaboration, streamline business processes focusing on customers. (4) Achieve synergies in retail banking, corporate banking for "Group retail banking"; (5) establish reasonable incentive mechanism for business synergy strategy. All departments share customers from different service channels, create business opportunities for other departments/branches. To conclude, the report stated out the steps to achieve business collaboration from strategy design, top-down design, mechanism design, information sharing, performance evaluation, system and platform. That include: short-term (0-5 years) - synergy between strategy, system and mechanism under existing framework; medium term (5-10 years) - further reform without restricted by existing system. Long-term (10 years later) - being the first-mover after the reform, achieve economies of scale and form core competitiveness. Build a comprehensive system covering Group Head Office, domestic branches and overseas branches, subsidiaries, as well as all business lines under Group management framework and Group operation mechanism.
The management framework of ICBC Group - organizational structure Li Qian With the opening up and development of the financial sector, the Industrial and Commercial Bank of China is moving towards integration spreading its wings across the world. The organizational structure is one of the most important supports of financial corporations, theoretical research and international experience can provide reference and experience. On the basis of the organizational structure and diversification strategy, the report suggested the organization structure of ICBC Group (subsidiaries, overseas branches) through case studies and matching of theoretical model and application model in different stages.
First, the report reviewed organizational structure and its theory of change, and stated the theory and logical evolution of corporate diversification. Organizational structure and diversified matching is the key to execute corporate strategy. Using resource-based view, the report suggested a resource-based model with diversification matched with organizational structure. To financial corporations who are going diversification and expansion, setting up financial holding company (in operation or purely shareholding) is the trend. A model with diversification matched with organization structure in stage is a possible solution for setting up financial holding company. Second, the report reviewed the organizational structure of HSBC (an example of a financial holding company in operation) and four large banks (Citigroup, Bank of America, Wells Fargo and JP Morgan Chase) which are examples of purely financial shareholding companies. By studying the organizational structure and the evolution of these banks, the report stated out the reasons behind the changes to the organizational structure, and analyzed the similarities and differences combined with resource-based model with diversification matched with organizational structure. From the study, the organizational structures of developed banks have become more similar to each other. Next, the report reviewed the history of ICBC's diversification and organizational structure, summed up the characteristics and analyzed ICBC's organizational structure using theoretical model. At the same time, the report pointed out three major issues in ICBC's diversed business / organizational structure: Head Office at the top of the hierarchy, simple structure, too few systems/platform to support business. Finally, drawing experience from developed banks, the report combined theoretical model and application model and offered suggestions in how to resolve ICBC's current issues, and how to build an organizational structure of a financial shareholding company in different periods - short-term (1-2 years), medium-term (3-5 years) and long-term (over 5 years).
The Human Resources Allocation and Performance Management in Commercial Banks Chen Xiao The report studied the human resources and performance measurement in state-owned commercial banks. Using theoretical approach, the report reviewed the actual practices and experience of financial institutions in and outside China. ICBC was used as an example to analyze the deficiencies of state-owned commercial banks in human resource allocation and performance management. Possible solutions were also suggested.
The report pointed out that human resource allocation and performance management has been the focus of discussion of the research and practice of human resource management. But in actual practices, no consistent pattern, no best practice, some financial institutions are making ongoing effort to improve. In terms of human resource allocation and performance management in state-owned commercial banks, ICBC being a state-owned commercial bank is still lagging behind the leading peers, mainly reflected in the more traditional management tools, management deficiency, insufficient enforcement , corporate culture still needs to be developed. Looking ahead, to better allocate human resources and improve performance management, state-owned commercial banks could use advanced management tools, enhance management and execution and build an appropriate management culture. To conclude, the report used case studies to study the interaction between human resource allocation and performance management.
Loan Business in Commercial Banks Chen Shi The report summarized the growth and experience of domestic and foreign commercial banks in lending to consumers, and discussed the new markets and new products in this business segment. The objective was to provide reference for commercial banks in China when extending credit to consumers. Macro economy posts direct impact for commercial banks to extend credit to consumers, affected by the retail spending of the consumers in particular. Since the reform and opening up, China's consumers spend less. Main reason is the low disposable income. Extending loans to consumers can effectively ease the conflict between China's residents’ increasingly strong consumer demand and relatively low disposable income. Bank loans stimulated China's consumers to spend while at the same time promoted the steady growth of the economy.
The report used the details of ICBC personal loan customers to analyze in-depth the spending characteristics of different income groups. From the study, with the continuous improvement of people's living standard, instead of basic necessities people spend more on entertainment, education and communication which become a new profit growth point for consumer loan business. The young white-collar workers have stable income and they like to spend. High-income people prefer spending on high-quality products. They are the target customer groups for consumer loans. Based on this, the report put forward two new consumer loan products - loans for overseas study and loans for buying private yachts. The report studied the market demand for these two loans, customer characteristic, similar loans offered by other banks, and offered suggestions on the product R&D. The report concludes with the risk when extending loans to consumers, prevention mechanisms and existing issues.
Loan Portfolio Restructuring and Credit Risk Control in Commercial Banks Hu Zhaoping The report used a combination of normative and empirical analysis to analyze the loan portfolio and credit risk control in commercial banks. In normative analysis, the report reviewed the loan portfolios, credit risk management and their relationship. Based on this, the report stated out the following: indices to evaluate the loan portfolios in the branches of commercial banks, a framework for providing loans to different industrial sectors and a model for providing loans to customers with minimum risk and maximum return. In empirical analysis, the report used Logistic model to estimate default rate; and analyzed the loans to different sectors stated in National Economy Industrial Classification (GB/T4754-2011). From this, the percentages of corporate loans to different industrial sectors can be derived. The report offered suggestions to ICBC on building up a loan portfolio with target structure in the next five years, referencing loan portfolios in international banks and ICBC's risk appetite and business strategy. The report also studied the allocation of economic capital to different regions and dynamic adjustment on RAROC threshold.
The report stated that, first, Logistic model gives good estimation on the default rate many macro factors can be used to estimate the default rate. Second, from commercial banks to extend loans, the first priority is to analyze the industry. Allocation of credit resource must be based on objective analysis. Loans to different industrial sectors must be matched with the industrial sectors in the economy, with little deviation. Hence, when extending loans, requirements should be the first factor to consider, next is the characteristics of the industry, commercial banks' risk appetite and business strategy. Third, dynamically-adjusted RAROC threshold can be used to achieve optimal loan portfolio under more market-oriented approach without the need to plan. Fourth, under interest rate liberalization, the rule for commercial banks to set loan interest rate is to proceed in steps. Head Office in charge of management, branches set their own rate, balance between risk and income, incentive + constraint. Loan interest rate should be related to loan portfolio. Fifth, large commercial banks may focus on providing loans to micro-and-small IT firms, in order to control risk large commercial banks need to improve their systems and l mechanisms, business models and talent-building.
Parent-Subsidiary System for ICBC Leasing Lv Zhenyan Amid global financial integration and crisis spreading on a global scale in recent years, the concern is the stability and support to real economy from the financial sector as well as potential risk. To large multinational financial groups who have experienced several financial crises, it has been proven that integrated operation can better compete internationally and weather crisis. From the progress of large international banks, a multi-level group management in terms of strategy, organization and resources is the foundation to sustain profit and compete internationally. The report used ICBC Leasing, a wholly owned subsidiary of ICBC Group, to study the relationship between ICBC Leasing and ICBC Group, and analyze the approach to set up a parent-subsidiary business model.
ICBC Group, while on track to become a world-class financial firm, has set up an organization entity comprising Head Office, branches, sub-branches, offering services to domestic and overseas markets in different areas - co-administrating bank, securities, fund, insurance and leasing. At this stage of ICBC's operation, compared to complex relationship between Head Office, branches and sub-branches, parent-subsidiary is much smaller in scale. At ICBC, business relationship between parent company and subsidiary is still in infant stage. In developed countries, leasing is the second tool to raise capital, next to bank loans. Financial leasing run by banks plays a key role in global leasing market. Especially, ICBC Leasing, a wholly owned subsidiary of ICBC Group, has witnessed fast growth since inception, which is a good example to study the parent-subsidiary business model in ICBC Group. Based on resources theory, evolution theory and the theory of value network, the report analyzed the financial leasing services of the banks in developed countries (Europe, United States, Japan, South Korea) and the strategic opportunities for ICBC. The report stated the management framework based on the competition between subsidiary and parent company and offered suggestion on how to evaluate the progress of subsidiary and parent company together.
Risk Management of Financial Leasing Business Wang Zheng To financial institution, risk management is always a topic. At present, in commercial banks, risk management of financial leasing follows the risk management of loan business. In this way, commercial banks quickly build up risk management framework for its financial leasing company, to improve risk prevention and control. However, after five years of development, in the face of market competition and challenges, as well as internal requirements and standardization in management, risk management model for financial leasing business is also facing new adjustment. Based on this, the report studied the risk measurement metric, organizational structure, business processes in financial leasing business, and offered policies and suggestions on the improvement.
The report begins with an analysis of the characteristics of the financial leasing business. The report pointed out that, since loan and leased property are combined, financial leasing is different from bank loan in different way. The main difference is the dual attributes of the leased assets, which can be both physical assets and financial assets. The dual attributes cause risk management of financial leasing different from bank loan. Based on this, the report studied the adaptability of existing credit risk management in financial leasing. From the comparison, the developed risk management system and framework of banks is a good reference for financial leasing company. However, due to dual attributes of leased assets, financial leasing company should seek new approach to set up risk measurement indicators combining customer credit standing, valuation of leased assets and project analysis. To improve risk management, financial leasing company should use top-level design. In top-level design, risk management should be on top priority from strategic point of view. A long-term effective mechanism should be in place covering strategic decision, risk culture, rules and system, organizational structure and operation, risk compensation and alert. During implementation, risk management culture, development plan, organizational structure reform, gathering of high-quality data, staff resources and training are points to consider.