The Research of Bank Risk Supervision Index System Based on the Internal Control

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Abstract

The domestic commercial bank survived the financial crisis since 2008 under the protection of the government， but to boost their stable development， the state is striving to reform the commercial bank system. We， under the background of overall revolution of the commercial bank， established a bank risk evaluation index system based on internal control and financial early-warning. After the fuzzy clustering analysis method is employed on Industrial and Commercial Bank of China （ICBC）， its comprehensive risk level between 2007 and 2011 is found to stay in the secure zone， but the interest rate risk is found relatively high.

Key words： Internal control； Financial early-warning； Risk supervision； ICBC

INTRODUCTION

The financial crisis， beginning in 2008， has pushed the U.S. commercial banks into the wave of collapse. Until October 2010， there has been more than 200 banks collapses or living hard， which shocked the world. In this context， risk warning about the financial industry is increasingly important. Banking， a core component of the financial industry， plays a role as the first transfer of the central bank’s monetary policy and one of the modern social and economic hubs of operation. Its healthy development is relevant to the normal operation of the macro economy and of great significance in risk warning research in practice. Our country’s commercial bank， in a very time when the financial system is in revolution and under a background where the state administration is powerful， is not sharp enough with market risk， for which the establishment of a comprehensive risk warning is urgent. As we all know， commercial banks is a highrisk industry. Since 1977 China’s commercial banks have gone through the expansion stage of development when the government function and enterprise management are successfully separated and its nature， status and relationship with other financial market players were determined. A huge commercial banking system based on four state-owned commercial banks； keep supporting China’s economic and social development. In deepening revolution stage， China’s commercial banks started to pay attention to risk prevention and in revolution crucial stage， in order to improve the competitiveness of China’s commercial banks and reduce the rate of nonperforming assets， capital adequacy ratio， specific focus is on risk issues The commercial banks are in great need of establishing risk controlling system to alert risk ahead of time to avoid uncertainty that may results in danger.

As can be seen from the above overview， a definite amount of research about the bank’s internal control and financial early warning have been done， but researching risk prevention combining the two elements has not been adequately studied. Internal control focuses on internal risk and current risk control while financial early warning focuses on external risk and long-term risk control； internal control are now able to do things in control and be controlled in advance， but difficult to do that ahead of time. Financial early warning can do advanced warning.

In theory， a combination of both applied to bank risk prevention will be able to play a synergistic effect. Thus， this article will be based on the idea seeking to establish a more comprehensive scientific objective of the bank risk early warning index system.

In Table 1， P represents positive index， and N represents negative index， I represent comparative fit index. Among the indexes， bank’s assets security is the premise of their normal development business， so more options heavily weighted in terms of indexes are to be established. Positive and negative indexes are mainly for the financial indexes， which refer to the relationship between its numerical size and risk. Valvevalue determination of the risk early warning indexes is done with system analysis and of the Commercial Bank of China， some important valve-value of the indexes has been determined.

Step 1 After correlation analysis， the final number of index is N， so what first is needed is to establish evaluation index domain X， it’s X = {X1X2 .... Xn} .

Step 2 According to the needs of the bank risk warning， the risk itself is divided into four assessment class： Green （assets stay in good condition， the risk is small and in a safe state）， Blue light （asset position is better， with less risk， in a relatively safe）， Yellow （assets in poor condition， the risk is higher， dangerous）， Red light （the poor condition of the assets， the risk is very high， very dangerous）， thus establishing evaluation level domain V={V1，V2，V3，V4}.

Step 3 Calculating Standard values and relative membership degree.We established N*4 standard matrix Y to calculate the actual value of each index relative to the different levels of membership：

For positive index， its numerical size is inversely proportional to the risk， that is Yi1>Yi2>Yi3>Yi4， the degree of membership is calculated using the following formula， and Xi （i = 1， 2， 3 ... N） represents actual value of the index.

3. CASE ANALYSIS

Industrial and Commercial Bank of China Co.， Ltd. was established in 1984， who is the first of China big four stated-own banks， one of the Fortune 500 companies， owning the largest customer base in China. Having the largest scale of assets， China’s Industrial and Commercial Bank has gone through 27 years of revolution and development， successfully entering the quality efficiency and scale coordinated development track. This paper selects the Industrial and Commercial Bank of china as a case study， and the data derive from each of the Industrial and Commercial Bank Annual Report. Finally we get ICBC’s comprehensive risk index as following：

CONCLUSSION

In this article， we have established a bank risk index system based on internal control and financial early warning. From the perspective of case studies， the weight of safety index is relatively large in risk analysis， especially for the non-performing loan ratio and capital adequacy ratio， so banks must maintain the Non- Performance Loan ratio and capital adequacy ratio in a healthy area. What follows is liquidity risk. Profitability and other are relatively of smaller weight. As be seen from the membership Analysis， commercial banks’ interest rate avoiding capability is relatively weak， so banks need to take appropriate measures to respond to interest rate risk. In addition， each bank， when doing risk analysis， can be adapted to local conditions， choosing different methods of data processing to enrich results.

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