The Risk Management And Value Creation For Commercial Bank

Commercial bank is the special corporation which runs currency business with the risk as a shadow since it came to this world. Commercial bank has to manage the risk to achieve its business goal under the precondition of matching the risk and profit. Commercial bank need to strengthen the risk control while trying to create the value, but the traditional Key Performance Index and Value Measurement Index, including Net Profit, ROE, EPS, P/B, P/E and so on, have some limitations and possibly make the measured result seriously distorted. These indexes without considering the risk adjusted could result in bank business departure the goal of value maximizations, so much as value lost. So commercial bank must set up a scientific system for key performance index and value measurement index.As a virtual capital related with risk, Economic Capital can become the unified standard of commercial bank risk measurement. It plays the role of"general equivalent"and build up a bridge between risk management and value creation. Thanks for these, the index systems based on economic capital and EVA management pattern, including Economic Capital, Economic Value Added, Risk Adjusted Return on Capital, are coming up.Currently, Chinese local commercial banks are keeping enhancing the awareness of capital management and risk management. The economic capital management comes up to comply with the New Basel Capital Accord, but still on the primary stage. Chinese local commercial banks could not completely follow the pattern on economic capital management of international banks, but refer their experiences to set up the economic capital allocation system, to enhance the bank management ability, to bring more value for banks.Based on commercial bank capital theory, risk management theory, value theory, this paper systematically illustrates how to set up economic capital management, risk management and value creation system. We research the current station of Chinese local listed commercial bank with the public share-holder banks as examples and give operational suggestions about the practical pattern of commercial bank economic capital management and EVA management.The major contributions of this paper, as well as its innovations, are primarily as followings:1.Based on the systematical discussion of economic capital theory, we construct a integrated management model, which has considering risk management, economic capital allocation and EVA.2.The paper illustrates several approaches of risk adjusted economic capital allocation using economic capital as a standard method for different kinds of risk and value management. According to the practice of commercial bank business, we also illustrate how commercial bank achieves the business goal for value maximization by using economic capital and EVA management approaches.3.We study the effectiveness of traditional indicator system for banks'key performance measurement to give several advices to construct a risk adjusted key performance measurement system.4.In order to make risk adjusted economic capital allocation more reasonable, we introduce concentration risk to economic capital allocation which should be concerned by commercial bank besides credit risk, market risk and operational risk.The future research will include: economic capital allocation must base on the scientific precise risk measurement model. Current research on risk measurement model theory is already consummate, but due to deficient technical support and lack of data, the risk measurement model constructed by Chinese local commercial bank could not be applied in the real business practices, especially for economic capital measurement of operational risk. Meanwhile, economic capital allocation is based on the different kinds of risks, but all necessary economic capital measurement just simply sum up all economic capital allocated for different risks, the relativity research among different risk measurement will be an interesting topic.