A Study Of Appropriate Regulatory Capital For Commercial Banks

Regulatory capital is the core of the risk management of commercial banks,which is also the standard to measure the stability of banking industry. The financialcrisis in2007has showed that commercial banks are facing more and more complexrisks, although the banks have reached the regulatory requirements, which still can’tavoid the losses caused by the crisis. According to the crisis, it can be concluded thatappropriate regulatory capital is playing an important role in risk management. After thecrisis, the Basel Committee issued the Basel III agreement, which redefined theconcepts of capital and improved the regulatory requirements of banks.Therefore, measuring the number of capital which is linked with bank internal risk andstudying the amount of capital which is used to release the actual risk is important todeepen the economic capital measurement of commercial banks and to improvethe level of bank risk management.First, this paper introduces the definition of economic capital and regulatorycapital of commercial banks, then introducing the evolution process of the Baselagreement on capital adequacy requirements, after comparing the different periodsof regulation requirements, we come to the conclusion that the modifiedBasel agreement on capital regulation standards reflects the current banking riskmanagement requirements. Second, we explain the current situation of capital regulationin China and put forward the method of measuring economic capital and regulatorycapital using VaR theory and option pricing theory. On this basis, we use the14listedcommercial banks in China as the research object, estimating the the economic capitalratio, regulatory capital ratios and minimum regulatory capital ratios combingthe option pricing model and maximum likelihood.The research shows that although the regulatory capital of China’s commercialbanks has reached the requirements of regulatory authorities, the amount of regulatorycapital is still less than the amount of economic capital, which can not completely coverthe risks. Commercial banks need to set higher capital adequacy standard to buffer therisk, and this may relevant with China’s banking regulatory capital arbitrage and risk weighted assets measurement method. Based on the empirical analysis, we put forwardrelevant suggestions and specific measures to maintain the appropriate regulatorycapital. We should enhance current regulatory capital standards in China, shouldestablish the long-term capital replenishment mechanism as soon as possible, shouldestablish a comprehensive risk management system which combinesthe Basel requirements with our country commercial bank capital regulation practice.