The Study On Economic Capital Management Of Commercial Bank

With the rapid expansion of commercial banks, the risk of commercial banks involved more, areas, and types of risk. The risk management has transited from asset-liability management to comprehensive risk management whose core is risk measurement and optimization. Basel Committee have formed final version of the new Capital Accord on June 26,2006. The new agreement highlights the importance of the economic capital management system of the commercial banks'establishing. Economic capital has become a necessary means in risk management of banks. The so-called economic capital, also known as risk capital, refers to a kind of capital, which covers an unexpected loss under a certain confidence level. Its theoretical framework mainly consists of three parts, the measurement of economic capital, economic capital allocation and performance assessment. Economic capital management system has played an important role in the commercial banks'operation and management. At present, parts of China's banks have introduced economic capital management system, but as China's relevant supporting facilities are inadequate, there are still some problems. This paper first introduces the three parts of economic capital management system, then analysis the problems of china's commercial bank in the allocation of economic capital and the related recommendations. In the end, it analyses the current status and problems in China's commercial banks'introduction of economic capital management system, put forward recommended measures.This paper is divided into five parts. The first part is about introductory, mainly introduces the analysis background, significance literature review and paper's innovation points. The second part is about the meaning and effect of economic capital. Economic capital is a needed capital for withstanding unexpected loss under a certain level of confidence, calculated by internal risk measurement model which is equal to unexpected loss, and also a kind of fictitious capital. Economic capital plays an important role in commercial bank's management. The third part is about the measurement of economic capital. "The New Basel Capital Accord" divides the risk of commercial banks to credit risk, market risk and operational risk. The measurement of economic capital is also measured by the composition of these three risks. The fourth part is about the economic capital allocation and performance assessment. Economic capital allocation methods can be divided into two types, the "top-down" and the "bottom-up". In the risk-adjusted rate of return, what widely accepted and widely used is the risk-adjusted return on capital (RAROC). Economic Value Added is a new measure of corporate performance assessment, which created and launched by Stern Stewart's corporation. The fifth part is about the application analysis of China's economic capital management system. Commercial banks in China have introduced economic capital management system, but there still have some insufficiency. The last part of this article is aimed at addressing these deficiencies and problems and making some shallow recommendations.