The decision mechanism of banks' credit risk based on information asymmetry

In the case of incomplete information. the maximum to entrepreneurs' profits does not mean the minimum of risk to banks' credit funds after they are granted a loan if their credit is not good. So how are banks to work out credit contracts with the entrepreneurs so that it can avoid risk furthest when the entrepreneurs come to apply a loan ? To study the credit risk for banks, we consider the problem direct fi om the losses or the opportunity losses to credit funds point. of view. The paper utilizes the idea of nonlinear programming to establish the decision model of credit risk for banks. We studied the decision mechanism of credit risk for banks respectively in credit markets on information asymmetry when there are two types of loan entrepreneurs with high risk and low risk respectively in society. We obtain the two concrete decision mechanism of credit risk and gave their detailed processes of the procf. The result of study show that banks can efficiently identify both the risk types to the two types of loan entrepreneurs and the extent lying to reporting risk information under the mechanism's action. By utilizing mechanism, banks can control risk to minimum.