Research On The Allocation Of Economic Capital In Commercial Banks

Recently, with the achieving of global economy and world-wide financial market, the bank system in China faces more kinds of risks and higher risk level. The emphasis of banking management also switches to an all-around risk control characterized in risk optimization from the traditional assets-debt management. The new concept by risk control emphasizes increasing the share holder's value and optimizing the risk structure based on the precise risk measurement. Economic capital is the direct embodiment of risk and the bridge between risk calculation and risk optimization. We can know the effect on share holders of a risk capital occupancy by means of economic capital, then under the restricted capitals, achieve the maximization of share holder's utility through the allocation of economic capital. Economic capital is becoming the common language of risk management and the principle of making strategies in commercial banks.So far, the research on the allocation and management of economic capital has just begun in China and there is no mature theoretical system framework. On this background, this paper does some basic research on the calculation and the allocation methods of economic capital, modifies the RAROC model, the core of the economic capital theory and constructs an analysis framework of it.This paper comprises five parts. The first three parts introduce the background and the significance of this paper, explain the concept of economic capital and the related theories of economic capital calculation and allocation, and prepare for the further discussion about economic capital. RAROC is the core of the economic capital allocation; thus in chapter four, given some appropriate hypothesis, based on the characteristics of investment-combination economic capital allocation and the idea of the insideβmethod of capital allocation, we modify the general RAROC model and provide some explanation and mathematical deduct for the several essential qualities about economic capital allocation in the modified RAROC model. After that, we construct the maximization adding value of combination model, form non-linear functions to obtain the optimal root, and give a simple example running with MATLAB under the restriction of economic capital and the restriction of combining the investment cash and the left capital, separately. In chapter five, we research the economic capital allocation in Chinese bank system from a practical point, introduce the specific economic capital measurement and management system given the practical methods of a commercial bank and provide some suggestions for the development of economic capital allocation and management in China.