What is Undercapitalization?

Insufficient capital risk refers to the risk that a commercial bank cannot maintain a modest amount of capital in capital management. A commercial bank possessing a certain amount of capital is a prerequisite for its survival and development. The amount of capital is not only an important indicator of the credibility of commercial banks, but also an important guarantee for measuring the compensation of commercial banks for unexpected losses and protecting the interests of depositors. Commercial banks must have sufficient capital in order to improve their credibility, strengthen their economic strength, ensure the normal conduct of business operations, and effectively resist operating risks. If a commercial bank fails to increase the amount of capital and maintain sufficient capital with the expansion of its business scale and the change in the structure of risky assets, it may endanger the creditworthiness of the commercial bank, reduce its ability to resist risks, and increase its operating risk.

Undercapital risk

The essence of commercial bank operation is to make a profit, which determines that the bank's capital adequacy ratio is generally not high, because the lower the capital adequacy ratio, the greater the bank's chances of profit. However, a low capital adequacy ratio will bring asset risk, and the lower the capital adequacy ratio, the greater the risk. At the same time, in normal business activities, the bank's asset scale is constantly expanding, and it is also required that banks continue to increase their capital. In this way, the capital issue has become a core issue in the bank's capital risk management. ^[1]

(I) Issuance of Ordinary Shares

Common stock capital is sovereign capital, and banks do not bear fixed dividends. When banks develop rapidly, they can issue ordinary stocks to the society to raise capital.

(2) Issuance of financial bonds

Financial bonds are a kind of marketable securities issued by commercial banks to raise long-term funds. In western commercial banks, financial bonds are often treated as secondary capital and counted as part of capital. Among the liabilities of China's commercial banks, financial bonds are listed as capital source items and are not counted as a component of capital. In fact, compared with western commercial banks, the financial bonds of China's commercial banks already have the same characteristics of capital. Although financial bonds have a repayment period, as far as the capital raised by a certain period of financial bonds is concerned, the bank cannot use it permanently, but if the bank can reasonably allocate the issuance time, term and variety of financial bonds, it can always be maintained permanently The balance of funds is used as long-term capital.

(3) Issuance of preferred shares

From the perspective of bank finance, the issuance of preference shares by commercial banks has two important functions: First, it can prevent a large decrease in earnings per share of ordinary shares; second, it can allow banks to obtain leverage benefits. Therefore, when a bank needs to increase capital from the outside, it usually considers issuing preference shares first, but because the capital of preference shares does not belong to sovereign capital. The degree of protection for bank creditors is not high, so banks cannot issue too many preferred shares.

(D) other methods

In addition to the above methods, there are two ways to increase bank capital from the outside: First, control corporate bonds. Controlling corporate bonds means that a bank holding company sells its own term loans or bonds and uses the proceeds to purchase common stock shares of affiliated banks to increase its own capital. Second, sale and leaseback. Sale and leaseback refers to the sale of real estate or other fixed assets by a bank, and then leased back to use. Selling a portion of fixed assets and replacing fixed assets with cash will reduce the bank's capital requirements, which will increase the bank's capital.