Transformation Of Economic Capital Management And Operation Of Bank Capital Constraints

Within the modern banking framework, the capital constraints can be divided into two types: regulatory capital constraint and economic capital constraint. The regulatory capital constraint is the external restraints, and it means that regulatory authorities require the bank's ratio of capital to risk assets must above 8%. Economic capital constraint is commercial banks'self-restraint. With the strengthen of shareholders'awareness of the capital return, commercial banks'operation and management must take into account not only the speed of asset expansion, but also give full consideration to the risks arising from expansion, and must associated revenue with risk.Only address the problems of Chinese commercial banks'capital adequacy ratio within the range of regulatory capital constraint can not guarantee the sustainable development of the banks. Only form the sense of economic capital constraint, and establish the economic capital management system, continuously improve risk management capability, and establish the economic capital allocation system, China's commercial banks can achieve the sustainable development in an efficient way.Based on historical and institutional reasons, China's Banks chose and pursued scale expansion and has been in a state of Capital soft constraint. Commercial banks pursuit of speed of development and lack of the necessary rational control, those result in the risk assets'excessive expansion and the huge capital gap. Moreover, the economic capital soft constraint also led to the low quality of banks'assets, and the disappointing profitability.This abnormal growth not only had a negative impact on the development of national economy, but also hinders the bank's sustainable development and constraints the international competitiveness of China's banks. In recent years, more and more people realize that the economic capital soft constraint is a major obstacle to China's commercial banks.But with the opening up of financial markets, economic capital constraints are gradually hardening. On June 26, 2004, Basel Committee formally announced the "Baselâ…¡" ,and form the concept of economic capital the first time. On February 23, 2004, CBRC announced "Commercial banks'capital adequacy ratio management approach" .Economic constraint is gradually tightening.With the Economic capital constraint, how can China's commercial banks find a correct development path? The author believes that the establishment of economic capital management system is the only way out. Economic Capital is a very complex and powerful indicators, its main function is to prevent risks and the create value. Economic capital management system will promote capital management and risk management and can promote the intensive development of China's commercial banks.At the same time, economic capital management system can be used to guide the banks'operational transformation, in the way of focusing on Intermediary Business and Retail Banking Business.Only in that way,can domestic banks use little economic capital to gain high Risk Adjusted Return on Capital(RAROC)or economic value added(EVA).According to this thought, the paper discuss mainly in two points: establishment of the economic capital management system and domestic banks'operational transformation. Chapters of content can be summarized as follows:In the soft economic capital constraint environment, domestic banks' expansion lack of the necessary rational control,so the bank's capital consumption rate is very high. At the same time, soft constraints environment do harm to domestic banks' Intermediary Business and Retail Banking Business, leading to low level of profitability.However, " Baselâ…¡" promote the regulation.And the capital constraints gradual transition to the economic capital constraints stage. This prompted commercial banks to establish economic capital management system, and use the system to guide the operational transformation.From the second chapter, the author use Citibank, ABN Amro Bank, and other industry leaders as examples to discuss the three main areas of economic capital system in detail, including: measurement of the economic capital, economic capital allocation and performance evaluation.The paper next references to the international advanced banks as cases, and discuss domestic commercial banks' establishment of the risk management framework, and establishment of matrix organizational structure, business process reengineering, so forth.Finally, the authors put forward that in the economic capital constraints environment,the traditional quantitative expansion mode of development is not sustainable, China's commercial banks are required to conduct operational transformation, and vigorously developing Intermediary Business and retail Banking business.Through the writing of this paper, on the one hand can make the understanding of economic capital system deepening for myself; on the other hand, the introduction of the Western commercial banks'system may also provide some valuable information and cases.As far as the research methods concerned, the authors adhere to the guidance of dialectical materialism and historical materialism, and use variety of analytical methods comprehensively, including historical analysis, empirical analysis and so on. Viewing from the contents of the papers, it is belonging to the forward direction of bank management. The study on the economic capital is at a very early stage, the existing research result is relatively little.In addition, author tries to do partial amendment to Credit Metrics Model. And through summarizing the existing domestic and abroad researches, author tries to revise the Model according to the China's specific situations.Finally, the case of economic capital management system used in Industrial and Commercial Bank of China is summed up from author's internship in that bank.But based on author's knowledge structure, academic standards as well as ability to analysis, ability to grasp the problem, there are many inadequacies in this paper:First of all, I have no working experiences in banks. Although having six months internship experience in ICBC, the materials about the economic capital management is out of reach,because it is viewed as commercial banks'secret;Second, the data of banks is very sensitive and difficult to access, some empirical models in papers are based on the virtual bank.Finally, as the theory about the economic capital management in western countries is developing very fast, authors may not summed up the latest theory.