Research On Economic Capital And Risk Management Innovation Of Commercial Banks

Commercial banks with high debt require their chief managers pay more attention to risk management. Concerned about the point that risks require capital coverage, this article explores how to manage risk effectively by Economic Capital(EC for short).Why EC is able to control risks effectively is because it takes some inner mechanism. After an analysis of Risk Adujested Return Of Capital, paper discusses the mechanism, including how the risk forms the border along the pre-simulation,how to effectively regulate the behavior of managers,and how to protect administratiors'rights to choose risk strategies.Then, on the basis of an comparison between risk management frameworks with or without EC management, we build up a framework to innovate the risk management.After introducting current situation about banks'EC practice in a number of domestic commercial banks, we attempts to assess the overall impact on their capital and risk management from EC. Then, paper do an empirical analysis by panel data,which is composed by data of fourteen Chinese commercial banks from year 1994 to 2008.The results showed that: just with three-year history, EC doesn't have enough influence on banks' capital and risk management, while analysis results about other variables reveal the correctness of the core idea of EC. Such as the reversly-moved relationship between capital and risk behavior shows that risk require capital coverage, which shares the same idea with EC.Apart from short history, the core system of EC has not been applied yet is another important reason to understand why EC doesn't effect risk significantly. To smooth the implementation of economic capital system,paper gives some suggests, such as, saving basic data continuously, recruitting professional risk management persons, constantly improving risk measurement standards, enhancing information disclosure system, and improve the risk and capital management of commercial banks step by step.