What banking business does not tie up economic capital?

What economic capital do you need to know before solving this problem? To paraphrase the encyclopedia, economic capital describes the capital required to cover the unexpected losses of a bank within a certain period of time (e.g., one year) at a certain level of confidence (e.g., 99%). It is calculated based on the degree of risk of the bank's assets.

Economic capital refers to the total amount of shareholder investment used to bear business risks or purchase external earnings, which is the capital allocated to assets or a certain business to mitigate the impact of risks generated by the internal evaluation of the management of commercial banks, so economic capital is also called risk capital. The calculation formula is: economic capital = unexpected loss of credit risk + unexpected loss of market risk + unexpected loss of operational risk.

I don't know if you can understand this. If you don't understand it, let's simplify it and understand it by just looking at the phrase economic capital, also known as venture capital.

Since it is risk capital, the purpose is to reduce the guarantee amount of risk guaranteed returns, and the role of this guarantee amount is obvious. It's put up for stability, so it won't be taken up by banking.

If you still don't understand, I will use the most popular explanation to say that your parents have saved 30,000 yuan for the elderly, and under normal circumstances, the living expenses of the family will not touch this money, because this money has the effect of reducing risks and maintaining stability. The example is not very appropriate, but the reason is pretty much the same.

If you still don't understand, then ask me again.

Book capital is the simplest one, which is the total amount of shareholders' equity items in the balance sheet, which is an accounting concept.

Both economic capital and regulatory capital are risk management concepts, which are the capital requirements of banks according to the risk level of different assets and according to a certain proportion. The greater the risk of the banking business, the more capital the bank needs to correspond, that is, the so-called "how much capital to do as much as possible". The risk here refers not only to the credit risk of the bank's assets, but also to other market risks such as trading businesses, as well as operational risks faced by various businesses.

Economic capital is a risk management tool within a bank, while regulatory capital is a regulatory tool for bank regulators to delineate a unified measurement standard.

Of course, the three most important risks of the Basel Accord are credit risk, operational risk, and market risk.

All risks correspond to economic capital, but the weights set by each bank are different, and there is no fixed formula.

The differences between economic capital and regulatory capital are as follows:

1. The definitions are different.

Regulatory capital refers to the capital that the regulator requires a bank to hold. The regulatory authority generally prescribes the minimum amount of capital that a bank must hold, so regulatory capital is also called minimum capital. The minimum capital is a requirement of the regulatory authority, so it must be clear and implementable.

The method of calculation shall be determined in advance.

Horizontal and vertical comparisons can be made between the minimum capital of different banks. Since the calculation method of minimum capital is relatively simple, the general public can also grasp the requirements and calculation methods of minimum capital. The minimum capital is the capital standard of the best banks, and other banks should hold higher capital.

Economic capital is an emerging statistical concept that corresponds to regulatory capital. Economic capital: From the inside of the bank, it should be reasonably held. From the perspective of bank owners and managers, economic capital is the capital needed to absorb unexpected losses and maintain normal operations.

2. The purpose is different.

The board of directors of a commercial bank approves and allocates economic capital according to the risk vision and strategic planning, so as to absorb or buffer the unexpected losses caused by all risks, and achieve capital coverage and risk management. Regulatory capital is stipulated by the regulatory authorities, and is mainly used to meet the needs of capital supervision, information disclosure and credit rating.

3. The content of the activity is different.

Economic capital allocation refers to the measurement, allocation and assessment of the economic capital required by the branches, business units and products of the bank, the constraint and portfolio management of risk assets, so as to achieve the goal of maximizing the risk-adjusted return on capital. The management of regulatory capital refers to a series of capital adjustment and capital financing activities to measure and test the capital adequacy ratio of banks, and to carry out capital restructuring and capital financing activities with the goal of capital adequacy.

4. The binding force is different.

Economic capital is the limit of economic capital allocated to all branches and business departments by the board of directors of a commercial bank according to the risk vision and strategic planning, and is the internal self-discipline that each branch and business department of a commercial bank needs to meet. Regulatory capital is the capital that commercial banks must hold according to the regulations of the banking regulatory authorities, and is an external constraint that commercial banks must meet.

The calculation formula is: economic capital = unexpected loss of credit risk + unexpected loss of market risk + unexpected loss of operational risk.

Economic capital appropriation, also known as an alien concept, is a new statistical concept, corresponding to regulatory capital, which is the capital required to cover the unexpected losses of a bank within a certain period of time (e.g., one year). Calculating economic capital is complex, and it is necessary to model and quantify the bank's risk. The capital calculated by the commonly used model (VAR) for calculating market risk is the concept of economic capital.

The role of economic capital is to make management more effective and to make better use of funds. Therefore, it is necessary to cooperate with internal control and external supervision. Under the common purpose of how to effectively manage, economic capital has derived many more headache concepts, such as customer probability of default (PD), default loss ratio (LGD), expected loss rate (EL), unexpected loss rate (UL), default exposure (EAD), etc.

The official definition of economic capital occupation is: economic capital refers to the total amount of shareholders' investment used to bear business risks or purchase external income, which is the capital allocated to assets or a certain business to mitigate the risk impact generated by the internal assessment of the management of a commercial bank. It is calculated as follows:

Economic capital = unexpected loss of credit risk + unexpected loss of market risk + unexpected loss of operational risk. In fact, the introduction of economic capital is to measure the actual capital requirements in the bank's business activities, which is conducive to the improvement of the bank's risk management ability, the establishment of a reasonable financial assessment system, and plays a key role in product pricing and product decision-making.

In practice, I basically think that it is the amount of capital that must be committed in order to make the loan.

For banks, economic capital is an important tool to maximize shareholder value, and its powerful management function is concentrated in three aspects:

First, in terms of risk management, economic capital, as the core variable of integration, can be used in key areas such as asset portfolio analysis, multi-dimensional limit management, and financial product pricing, which is the fundamental way to achieve scientific, systematic and refined risk management. Second, in terms of performance appraisal, commercial banks can establish a performance appraisal system that combines risk-adjusted return on capital (RAROC) and economic value added (EVA) on the basis of economic capital, so as to form an incentive and restraint mechanism that takes into account risk and return, scale and quality.

Third, in terms of resource allocation, banks can determine business development strategies and capital investment directions in the coming period by formulating rigorous and pragmatic economic capital divisions, and form a policy system with clear goals, strict constraints and strong enforceability, so as to achieve optimal allocation and efficient use of various resources.

Funds that are owned by the bank itself and can be used at their disposal on a permanent or permanent basis are known as bank capital. Bank capital is the amount of capital that a bank must invest to maintain its normal operating activities.

Bank capital consists of two parts:

First, the borrowed capital of the bank, the purpose of which is to absorb deposits, and this capital part accounts for the vast majority of the bank's capital;

Second, bank capitalists invest in the creation of banks. Bank capital has two characteristics. From the perspective of borrowed capital, bank capital falls under the category of borrowed capital; However, from the point of view of the bank's use of capital and profit, bank capital also has the characteristics of functional capital.