Commercial Banks Capital Allocation

Since 1990s, the style and content of risk management inbanks all around the world have been developing and mostadvanced western banks have set up a risk management systemcentered by capital restriction. There are two key points in capitalmanagement in western banks. First of all, the total amount ofcapital in a bank should satisfy different requirements, such as theexpectations of the credit rating agencies, the level of riskevaluated by the bank itself, the regulations made by the regulatoryauthorities and the shareholders' expectations of return oninvestment. The matters above boil down to the problem of capitaladequacy. Besides, bank managers should also allocate theeconomic capital in the most efficient way , calculating the capitalneeded for each kind of risk, each department and each line ofbusiness.For a very long time, banks in China have paid much attentionon asset and liability management but little on capital management,so they should transfer the core of risk management as soon aspossible, deepening and perfecting the capital management. Thispaper points out that the capital restriction in banks in China in thecurrent just means satisfying the regulatory requirements and it islagging behind the risk management in international banks, whichis centered by capital restriction. The conditions of exteriorenvironment , structure of organization, quantification technologyof risk, the building of system and the expertise in domestic banksare not mature enough that it's difficult for the banks to use thecapital management practices in advanced foreign banks. Thispaper concludes that the capital management in domestic banksshould be centered by the regulatory capital management in thenear future. But efforts should be made to develop the capitalmanagement. First of all, the total amount of capital in domesticbanks should keep up with the international standards in the lowestcost and a regulatory capital allocation system should be set up sothat the regulatory capital can be managed efficiently. In themeanwhile, domestic banks should make greater effort to study theeconomic capital, creating the conditions for the transition to theeconomic capital management in the future.