The Research On Economic Capital' Calculating Methods And Management Of Commercial Banks

Economic capital directly started in practice of management of international bank. Based on profound understanding of relationship between risk and capital, the concept of economic capital present itself in the field of management of commercial banks and develop into a new management method. Economic Capital'management is now a management system and mainly includes economic capital'calculating methods and application.This paper first illuminates the concept and function of economic capital, the difference between concept of book capital and regulatory capital and brief of Economic Capital'management system including Economic Capital' calculating methods and application. Conditioned the confidence level and time horizon, economic capital'calculating is an estimate of loss distributing of a specific object. The basic latitude of calculating is type of risk. Therefore the paper illuminate respectively economic capital' calculating of three types of risk: economic capital'calculating of credit risk, economic capital'calculating of market risk and economic capital' calculating of operational risk. The paper mainly illuminate calculating models and methods which are now used in some advanced international banks. These methods are:VaR model of credit risk for example KMV model, VaR methods of market risk: historical simulation, model-building approach, monte carlo simulation, calculating methods of operational risk: basic index approach, standard approach, score card approach, internal measurement approach and loss distribution approach. In the section of economic capital'application, the paper illuminates the concept of RAROC and economic capital and performance measurement based on RAROC. In empirical section, the paper review and adjust parameters of KMV model which can directly use stock prices and financial date of listed companies to measure credit risk using a key index-"distance to default" called DD. Through DD index the paper selects listed companies and studies performance of such index to distinguish between "good" company and "bad" company. The research finds that accurate estimate of volatility is the key to improve precision of the index of "distance to default". The research find a problem that mean of distance to default of ST company is higher than that of non-ST company however theoretically ST's DD should be lower than non-ST's DD.The paper concluded that commercial banks should focus on studying and considering parameters and variables when they uses models which are introduced from advanced countries or they designs their own models. These parameters,variables even the whole model's applicability are always correlative with conditioned outside circumstance. For example, the paper refers to capital market and fact of statistic date to build mapping from DD to EDF. Commercial banks should consider and study the below main factors when they calculates economic capital by using KMV model:First, setting problem of pricing non-current stocks. The fact is that stocks in our capital market are artificially divided into current and non-current stocks. So the final setting problems of pricing non-current stocks is a basic work for further study. Second, estimate of volatility. The research shows that the most important factor to calculate DD is accurate estimate of volatility. The reason that ST's DD is larger than non-ST's DD is that ST's volatility is smaller than that it should-be. So complete mechanism of listed company's withdrawal will make the volatility of stock reflect its should-be volatility. Third, setting problems of two equations which can get the most important variables:VAandσA. By now there are some types of Option-pricing models. Selection of the best model which can apply to our market should be further discussed and studied. The relationship between theσA andσE is different in different markets. So this need to study the.relationship which apply to our market. Fourth, further empirical study on DP andμ. The study on default point of companies in our market and the conclusion of DP is basic work in further study. Furthermore the paper use VA instead of E(VA) meaning expected increasing ration of company asset is 0. So in future our study should introduceμinto model. Fifth, the mapping from DD to EDF. KMV model use the fact of statistic date to build mapping from DD to EDF to improve estimate. For our country, building such date will be a long basic work. Finally based on above conclusions and finding problems the paper give advices:KMV model which use stock prices and financial date of listed companies to measure credit risk requires comparatively perfect capital market and timely,accurate and reliable information published by listed companies. By this KMV model can give us its advantage. The final setting problems of pricing non-current stocks, improvement of mechanism of listed company's withdrawal in our stock market, making the price and volatility of stock reflect the real its inner value and should-be volatility should be main factors which are considered by domestic commercial banks.Besides capital market, empirical study on DP which is applicable for domestic companies, introducingμinto model and fact of statistic date to build mapping from DD to EDF are domestic commercial banks's own basic work.