China Construction Bank Economic Capital Measurement And Its Application Research

Since the content of economic capital in modern banks covers risks in nearly all areas, implementing economic capital management becomes an inevitable trend of modern bank management and risk control. It is the actual requirement of banking supervision and the New Basel Capital Accord as well. At present, a number of joint-stock banks have established the economic capital management system and the concept of economic capital has been used in most of domestic commercial banks. However, its role on controlling risks, creating values and optimizing resource allocation has not been fully played. In addition, there are problems in the process of managing economic capital, for sate-owned banks in particular. Based on the theory of economic capital and western experience and taking China Construction Bank as an example, this paper is to analyze how economic capital management is applied in commercial banks and provide suggestion to improve management.This paper reviews some basic theories associated to economic capital at the very beginning, and then summers up achievements and experiences that Chinese commercial banks have got on the basis of development, system and experience of economic capital management in western commercial banks. It also illustrates the significance of economic capital on bank risk management.Reviewing the theories and experiences home and abroad, and status quo of the operation of commercial banks, this paper analyzes the economic capital measurement applied in CCB, as well as its application and effect. Firstly, it discusses the general framework of economic capital management of CCB. That is performance appraisal system focusing on economic capital measurement, economic capital budget allocation system, EVA and RAROC. Then, it analyzes the major content of economic capital measurement of CCB, including economic capital measurement for risks on credit, market and operation. This paper also points out that the application of economic capital plays a significant role for CCB to manage risks, price products, restructure banking products, optimize portfolio, manage risk limit and evaluate performance, etc. At the same time, the author points out the major shortcomings CCB has during the application of economic capital. Economic capital is not totally understood; it is not perfect in evaluation system; and its allocation is not reasonable. These problems are caused by many reasons, for instance, CCB has a great many branches that have not formed the concept of economic capital management; the enforcement of the management is not enough and technology of measurement is imperfect, etc. Therefore, this paper proposes strategies for china business bank to manage economic capital effectively, including setting up a sound economic capital management system covering market risk and operation risk, keeping EVA and RAROC as the center of performance appraisal system and incentive mechanism, etc.Constructing the model of risk management in modern commercial banks with economic capital management as its core provides a direction for Chinese commercial banks to reform and develop. It is also a key strategy for them to enhance corporate value. Implementing effective strategies will help overcome the shortcomings that Chinese commercial banks have in the use of economic capital so as to improve our ability on risk management and our competitiveness.