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On the economic capital based commercial bank risk management research

Author: QianYiPing LinXiang From: www.yourpaper.net Posted: 2010-06-09 01:16:04 Read:
Paper Keywords: New Basel Capital Accord economic capital the RAROC model of commercial banks risk management
Abstract: With the commercial banks, management and supervision of the continuous development of economic capital as an important tool to the bank's risk management and value creation, increasingly concerned about the connotation of the paper first describes the three-owned Christine's Perspective of the New Basel Capital Accord, and then study based on the insurance value of economic capital measurement, RAROC model and build on this basis, and finally make recommendations
With the foundation of the deepening global economic integration of Bei, save and development, more and more attention. The traditional risk management study how to prevent risks, how to reduce the risk of modern risk management focuses on the management of innovation, technological innovation, establish and improve risk management, compensation and pricing mechanisms. International banking capital management, economic capital is proposed and applied to promote the overall unity of the commercial bank risk management and capital management. How risk quantification price, prices offset risk, the banks steady amount of value-added and sustainable development has important theoretical and practical value for the bank's risk management.
capital categories in the Perspective of the New Basel Capital Accord
The end of 2006, the implementation of the New Basel Capital Accord risk-based bank capital compensation function, proposed three types of capital:
Book capital (BookCapital, BC)? Book capital is directly reflected in the balance sheet, specifically by the paid-up capital, capital surplus, surplus reserves, retained earnings and general reserve composition, which reflect the actual financial institutions have capital levels is static reflection of bank capital, rather than the level of capital should have. Therefore, the carrying amount of capital banks face a real risk of no association. Regulatory Capital (RegulatoryCapital, RC o regulatory capital banks must hold to meet the minimum standard capital. Specifically divided into core capital and supplementary capital and Tier 3 capital which core capital, including equity capital and public reserves; supplementary capital includes undisclosed reserves, general loan loss prepare hybrid capital instruments, revaluation reserves and long-term subordinated debt and other five categories; the three capital that short-term subordinated debt.
Economic capital (EconomicCapital, the EC o economic capital, also known as risk capital, capital is not true, but a virtual capital calculated by the commercial management of the bank's internal assessment, to resist the various businesses (asset) risk to mitigate unintended the loss (UnexpectedLoss UL); need to hit the capital in support and demand.
In essence, the book capital is determined by the commercial banks, mainly used to optimize the capital structure and reduce costs; regulatory capital prescribed by the regulatory authorities, mainly for foreign meet capital regulation, information disclosure and credit rating need not necessarily reflect the the risk characteristics of a particular bank, can not represent the actual bank's ability to absorb UL; economic capital is calculated by the commercial banks' internal, mainly for its own capital and risk management.
economic capital measurement VaR constraint
(A) the basic functions of the economic capital
The New Basel Capital Accord commercial banks to improve the risk sensitivity, and encouraging commercial banks to continue to improve the important idea of ??the level of risk management, the supervisory authority is the bank's internal estimates of the EC as the basis of the regulatory capital. The economic capital is the bank really need to risk capital, the main function is to prevent risks and to create value. Mainly reflected in: First, to ensure compensation and risk management of commercial banks, and to meet regulatory requirements; guaranteed capital to the optimal configuration in order to get the best return, at the same time can be used to evaluate the bank's strategy and support the decision-making.
(B) the measurement of the economic capital
The nature of the economic capital risk, economic capital measurement is the essence of risk measurement, measurement unexpected losses. More stringent definition of economic capital in certain risk confidence in a certain period of time, banks use internal models and methods of assessment for the mitigation of risk impact of capital allocated to an asset.
From a statistical point of view, the economic capital is defined as a certain confidence level and holding period for capital against unexpected losses, so the number of economic capital minus the expected loss is equal to the maximum loss. One of the biggest losses, according to the American financial risk management expert the the P Chuan ippeJorion the point of view, that is, the value at risk (ValueatRisk, VaR o the statistical language VaR defined as a certain confidence level of a financial asset or portfolio Maximum possible loss within a specific period of time in the future. Therefore, to measure the VAR must first determine two number of time intervals and confidence levels. Generally, the time interval selection is decided by the characteristics of the asset itself, the confidence level of choice depends in its use.
Let V for a ~ financial asset or portfolio loss within the holding period t o [confidence level,: P {AV VaR} = 1 - a l time losses exceed VaR probability 1-Oc. Therefore, in accordance with the definition of the economic capital available: EC the VaR-E [ V] where E [ V] for the expected loss. Economic capital allocation under the RAROC model and its application
(A) RAROC model 1970s, Bankers Trust was first proposed of RAROC (RiskAdiustedReturnOnCapital risk-adjusted return on capital rate) model. RAROC is a risk-return equilibrium model, its core ideology, and the biggest difference with the traditional performance metrics: the introduction of a risk-adjusted income assessment function to quantify the risks of future expected loss for the current cost, direct current earnings adjusted measure of the size of the risk-adjusted earnings, and considered as the biggest risk may make capital reserves, and thus measure the efficiency in the use of capital, so that bank earnings risks directly linked with the unity of the bank's ultimate profitability goals. According to modern portfolio theory, RARQC can be considered to be a Sharp (sharp) ratio of the business sector, equal to a transaction, all related to a product or business income in the net after net of expected losses and related costs divided by occupied economic capital ratio, its formula is:

(B) RAROC model
Bank managers in order to protect the security of the bank's operations, through the RAROC calculations and comparison with the lowest rate of return, restructuring and banking products business structure set up trading contracts trade-offs. The RAROC model in banking application has a number of levels:
1 in the bank overall level, RAROC is capital allocation and setting business objectives means. The bank's top management by calculating the bank overall economic capital and regulatory capital and book capital compare and evaluate their own capital adequacy; its limited economic capital requirements of the various types of risk, at all levels and a variety of business be allocated between the total control of the bank's overall risk and the various types of risk; shareholder returns and requirements into clear objectives for the bank overall and individual business lines for the approval of the business and performance appraisal.
2 in the individual business level, RAROC is the basis for business decisions. RAROC value of a business and reflects the bank's capital cost benchmark rate of return compared RAROC value> benchmark rate of return, then the business for the bank to create value; RAROC value Assume that a bank of a business income of 500 million, and operating costs of $ 300 million, and the expected loss of 100 million yuan, the economic capital is 400 million, then the RAROC = (500-300-100) / 400 = 25% of assumed that the degree of risk the business takes regulatory capital is 300 million yuan, the benchmark rate of return = (500-300-100) / 300 = 333% From the above, of RAROC than requiring a low rate of return on capital, to carry out the business higher, prudent investment. The same time, the calculation of the two yields the same molecules as the denominator of the economic capital than the regulatory capital, RAROC will lower the true reflection of the risks and benefits of the business relationship.
3 at the portfolio level, RARQC is a powerful tool for portfolio management. Bank RAROC calculations based on a combination of assets and dynamic detection, to measure whether the balance of risks and benefits of all kinds of combinations, to make business pricing, and the combination of assets RAROC indicators have worsened or have significant adverse trends in a timely manner to take an active management measures.
Revelation of China's commercial banks risk management
With the implementation of the New Basel Capital Accord, the international banking and capital management realized the leap from regulatory capital to economic capital, economic capital proposed and applied to promote risk management and capital management in commercial banks as a whole unified Although most of the domestic The commercial banks have introduced the concept of economic capital management, risk control, value creation, and the optimal allocation of resources is not fully play a role. In the future, China's commercial banks risk management should be mainly focused on the following points:
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