The Allocation Of Economic Capital Of Commercial Banks Based On The Principle Of Convexity

The study about the allocation issue of economic capital of commercial banks is to study when the capital has a certain constraints, senior managers how to make use of the limited capital to maximize the economic benefits of commercial banks under the condition of a certain risk level. It has become one of the major problems that senior managers of Chinese commercial banks and theory researchers should be faced with now.At present, researches on such an issue are generally based on a certain principle of the allocation (such as:the principle of consistency), and set the rational allocation strategy with the aim of maximizing the overall value of the commercial banks. The latest researches show that the allocation of economic capital based on the principle of consistency requires meeting four properties:full allocation, no undercut, symmetry and riskless allocation. However, due to the effect of portfolios, the risk capital of the company which has a variety of business is less than the sum of the risk capital of the independent business, full allocation of the economic capital in the reality is usually impossible. Then, in view of the convexity characteristics of the combined effect in real economic allocation, the article proposes the convexity principle of economic capital allocation. And it also provides the optimal allocation method of the economic capital of the commercial banks based on the principle of convexity.Firstly, this article presents the basic principle of the allocation of the economic capital of commercial banks-convexity principle, and then introduces the method of the allocation of the risk contribution which satisfies the convexity principle-Euler approach.Secondly, the article constructs the optimization model which measures the performance of whole banks from the aspects of EVA, ALR and CFFOA. In addition, it solves the optimal allocation amount of the economic capital on this situation of three branches.Finally, the author conducts an empirical analysis on the allocation of the economic capital of commercial banks, which shows:the EVA from the allocation of the economic capital based on the principle of convexity is higher than that based on the consistency principle. In other words, the allocation of the economic capital based on the principle of convexity is beneficial to enhancement of the business performance and the economic benefits of the whole banks.