Path to China's Banking Economic Capital Management——Thought Inspired by New Basle Accord

Economic capital is an important means to strengthen internal capital and risk management by commercial banks. Through the use of economic capital and other risk-based management tools,financial institutions can quantify the risks they are facing and calculate the capital needed for risk reduction and profit margin after real-risk-based adjustment. Most domestic banks lag behind other advanced countries in economic capital utilization. This paper using IRB approach in New Basle Accord provides a solution for domestic banks to improve their economic capital measuring capabilities under current conditions. It is argued that to realize the ultimate goal of effective capital management,domestic banks should lose no time developing a quantifying model with key risk parameters,strengthen IT system of capital management and establish procedures for capital planning and implementation.