Development of Credit Risk Model Based on Fuzzy Theory and its Application for Credit Risk Management of Commercial Banks in China

Abstract

Artificial intelligent techniques were successfully used in modeling of highly complex and non-linear phenomena such as the credit. This study developed the traditional credit risk model to evaluate the credit risk of the commercial banks based on the fuzzy theory. And then the membership functions for the model were established with the evaluating indexes which belong to the credit risk degree gather of the commercial banks. For the convenience, Principle Component Analysis was also used to reduce the factors which have diverse impact on the credit risk degree of the commercial bank The results show that the new model developed in this study can be used to make a quantitative evaluation of the credit risk of the commercial banks. Especially, the case study shows that the new credit risk model has a good application for the commercial banks in China. The results indicate that the new credit risk model may give the commercial banks in China a new method for their risk management.