Research On The Allocation Of Economic Capital In Chinese Banks And Allocation Of Economic Capital Based On Asymmetric Information

The capital management in the modern commercial bank is closely linked to the risk management. It is the capital that incarnates the ability of commercial bank to resist the risk, limits the pace and scale in which commercial bank to expend the business, and finally determines the possibility of commercial bank to survive and thrive in the market.After November 2006, our country no longer got the financial industry protection from WTO. This means our banks have been put into a situation of fierce competition, together with the international banks. Because of this, our banks must spread the idea of capital management widely, and built up the system of economic capital management which fits our national conditions as soon as possible.This article analyzes the efficiency of capital management of four Commercial Banks based on their main business line. We point the main problem existing in management of capital of the four using RAROC method.According to economic capital theory and means, this article analyze an allocation process for economic capital in financial firms based on an internal market mechanism. Decentralized divisions can trade the risk capital they need for their business in this market. The required capital is based on marginal risk contributions. Due to interdependencies between the businesses of the divisions, actions of one division may affect the capital requirement of other divisions. We analyze the internal market for economic capital and its equilibrium. As the equilibrium is not optimal, the market-based solution is not the best one which could theoretically be obtained. However, we demonstrate how headquarters can set incentives to let the solution converge to the optimum.