Economic Capital Is The Core Of The Bank's Capital Management System

Bank's capital management is the core of modern banking management, which now has become an important basis for strategic decisions, and an effective guidance for operations. Over half a century, the core value of banks management evolved from asset management, liability management, asset liability management in four stages to risk management. As a result, bank's economic function as risk intermediation has been established. In this process, the bank's capital management system which utilizes capital instruments to obtain the benefits against the risk is gradually built up.Early capital management took the capital adequacy ratio to as the core, which is to meet the regulatory requirements for regulatory capital. As an external constraint, regulatory capital has birth defects in the accurate measurement of risk, for which it is not efficient enough to manage bank risk and benefit. In an increasingly competitive environment, the economic capital generated as a variant of regulatory capital. Utilizing internal models, economic capital measures the actual risks borne banks to measure the amount banks need the capital, and then use the risk-adjusted return measures the performance of all assets, departments or business lines. Economic capital meet the requirements more than regulatory capital of bank's more complex and rigorous risk control and efficiency improvement. With the help of this tool, bank's linkage of risk and return has been fully reflected. Since then, the economic capital has gradually replaced the regulatory capital as bank's core of capital management system. And then it formed an integrated bank capital management system which combined with economic capital measurement, economic capital allocation and performance evaluation of the use of economic capital. At the same time, regulatory capital was developing into precision and complex. For the difference between their objectives and functions, regulatory capital and economic capital constraints would exist in long-term.This paper compared regulatory capital and economic capital in different dimensions sufficiently. Based on that, this paper explored the he bank's capital management system which takes economic capital as the core. Firstly, this paper analyzed different concepts of bank capital , clarified the relations between different concepts, and forecast its development trend roughly. Then the three components of economic capital management system are discussed. Which followed is China's actuality of domestic banking capital management system in the process of banking reform. Finally, it is the conclusions and related policy suggestions. This paper focused on economic capital, and compared regulatory capital and economic capital in various parts and from different angles and levels, for displaying a full and comprehensive outline of the trends, in which the core of bank's capital management system transformed from regulatory capital to economic capital.