Economic Capital And It's Application In Commercial Banks

In the commercial bank's capital management system, the management of economic capital increasingly shows its importance and necessity. In recent years, the theoretical study of the economic capital becomes more and more frequent and the investigation and use of its econometric model are continuously in-depth, a series of comprehensive theoretical systems have already established in the western financial world. At the end of the last century, the Basel Committee has further modified the "New Basel Accord", the concept of regulatory capital was enhanced and several new contents have been added. The refined document provided a new model for the commercial bank's capital management to follow. In China, the innovation and self-development of the commercial bank urged its internal management system tends to mature. The commercial banks have begun to introduce economic capital management concepts, and began to be gradually applied it into their day-to-day routine operations and managements. The Construction Bank is a forerunner of those banks.The establishment and application of economic capital management concept well solved the problems of the continuous development within the management. Banks operating as a special enterprise which support currency, there are huge operational risks lurk in them. How to balance benefits and the huge risks and how to approach maximum shareholder's financial benefits under the prerequisite of controllable risk, are the key problems operators want to solve the most.While introducing the concept of economic capital, this paper also illustrates three stages of managing economic capital, that is, measurement, allocation, and performance measurement. These stages are the completely whole process. Measurement is fundamental beginning, while allocation is method and is the pivotal aspect, and performance is the guarantee and examination of economic capital. Bank risks are categorized into credit risk, market risk and operate risk in New Basel Accord, so this paper introduces three measurement to calculate different kinds of economic capital of risks. Because the credit risk models are more improved, we describe more completely on credit risk. Furthermore, based on economic capital, RAROC reflects the real risk and combines the bank performance and shareholder's interests. The RAROC method is more reasonable and important. It can help the bank achieve interest maximization by selling assets, Securities or other credit derivatives.Based on the application of economic capital in commercial banks, this paper demonstrates the significance of economic capital management in banks. This paper is divided into seven parts. The first part is introduction. Part two describes the basic concept and the development of economic capital and risk. In the third part, this paper explores the measurement and allocation of economic capital and finds the advantages and disadvantages of different method. Part four gives us a description of current situation that some China's commercial banks apply economic capital and highlight the economic capital measurement in China. Part five analyses the economic capital application of China's commercial banks. Part six focus the effects and problems under the implementation of economic capital in China's commercial banks. At the end, we conclude.