The Study On Economic Capital Measurement Of Commercial Banks Based On Default Correlation

The core of credit risk management in commercial banks is to quantizate the economic capital on the basis of quantization to the credit risk. Economic capital (Economic Capital, EC) refers to the capital which is used to coverage unexpected loss of loans in the commercial banks under a certain tolerance. Economic capital management has become an important tool of risk management in modern commercial banks. The correlation between loans has a great impact on the loss of loan portfolio of commercial banks. Therefore, we build an economic capital measurement model based on the default correlation.In this paper, we bring forward a new method of economic capital measurement using the single-factor model and the weighted average of band classification. Single-factor model has been mainly used to get the supervision capital of a single loan in the Internal Ratings-Based Approach, and also been used to analyse the loss distribution of the loan portfolio theoretically in some literatures. Band classification is a method of CreditRisk + model and the error of it's result is very big when data distribution is not uniform, so we have adopted a weighted average of band classification. In this paper,we first put homogeneous loans into a band through the weighted average of band classification, and then get of loans'portfolio in the same band by using single-factor model,and then transform the default percentange distribution into the loss distribution, and ultimately get the economic capital.We use some loans'data of a city commercial bank in our country to illustrate our method.Through the calculation ,we found that the economic capital measurement model based on the default correlation can be used to calculate the economic capital of loan portfolio,and expand the application scope of the single-factor model. The economic capital calculated through the model is positively correlated.At the same time, we found that we can get the economic capital of loan portfolio using the method which is similar to CreditRisk + model's when the number of loans are quite big and the correlation between the loans are small.So it shows that the model is effective. Lastly,we explaine that our method is only applicable to the portfolios which have a lot of loans, and not to portfolios containing few loans,So it has some limitations.It needs more measures when the economic capital measurement method based on the default correlation is applied in practice. Specific measures include: strengthening the establishment and perfection of various types of database; perfecting the economic capital management of our country's commercial banks and building good environment of the risk management.