Calculation Of Commercial Banks' Risk Reserve

Based on their own needs of sustainable development and the requirements of regulatory agencies, commercial banks are in an urgent need for a more accurate measure of the credit risks, market risks and operational risks faced by the commercial banks in their business courses. To be well prepared for the risks, banks are required to hold capital for potential losses. In order to achieve the balance between risk management and profitability, the traditional way is to calculate a simply summation after get the loss reserve of each type of risk. This method implies that losses of different risks are completely positive related. And in the practical application, it will result in overestimation of the risk losses which leads to excessive risk reserves and then affects the profitability of the commercial banks.We applied the widely used Value at Risk (VaR) method to measure the total risk status resulting from various risks encountered by the commercial banks. As for different types of risks, we use copula function to study their correlation. On this basis, we established a commercial bank risk management medol. We imployed Monte Carlo simulation to simulate the risk losses and got a more precise measure of the risks. Take a ten days holding period, we get a significantly smaller estimation of losses with our method than that of the traditional way thereby enabling commercial banks to determine more accurately the amount of capital they need to operate their businesses.