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The RAROC bank economic capital allocation study

Author: LiYongXiao
Tutor: JiangXueJun
School: Dongbei University of Finance
Course: Finance
Keywords: Economic Capital Risk Adjusted Return on Capital Risk Contribution Cost of Capital Capital Asset Pricing Model
CLC: F831.2
Type: Master's thesis
Year: 2005
Downloads: 498
Quote: 4
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The advancement of the concept Regularity Capital in Basel Agreement, impelled the development of banking supervision and development. However, because the supervisors viewed the bank capital in the sole angel of the safety of the banking system, the regular capital can’t reflect the actual risks in face of banks. In order to correct this flaw, many big international banks introduce the concept of Economic Capital when developing the risk management models to measure risks that banks confronted in various services. The EC, once proposed, has soon exceeded Regularity Capital and become the core theory of banking risk management. How to allocate the finite capital best to achieve the largest efficiency has become what the modern banking industry can not avoided.By years’ of research and practice, the international advanced banks have formed a comprehensive risk capital framework, called RAROC and used for economic capital allocation and achievements appraisal. The RAROC was accepted by international advanced banks soon after it was advanced and it gradually substituted the traditional method of capital allocation. Now RAROC has already become the new idea of banking capital allocation. While domestic research in this field is just at the beginning, the related researches, which are mainly focused on the translation and introduction of overseas research results, are mostly fragmentary introductions and lack systemic research.This thesis is developed under the above background. It makes an explanation of economic capital firstly, and then gives a comprehensive introduction to RAROC based on the current situation of Chinese banking capital management. When using RAROC to measure the performance of bank’s business units, we found that it lack accurate scale of capital allocation in operation, though it can be used as foundation and basis of bank EC allocation in theory. To settle this problem, we introduce the theory of Risk Contribution based on the mode of EC allocation.

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