What Is the Importance of Return on Equity for Banks?

Bank capital refers to the funds that a commercial bank owns or can permanently dispose of and use. It is the capital that a bank must inject into operating activities. From the perspective of ownership, it consists of two parts: one is the private capital of the bank's capitalist investment bank; the other is the borrowed capital that absorbs deposits. Borrowed capital is a major part of bank capital. From the perspective of operating borrowed capital and using its own capital as borrowing capital, bank capital belongs to the scope of borrowing capital. From the perspective of operating a capitalist enterprise and obtaining average profits, bank capital has the characteristics of functional capital.

Bank capital

Definition: Bank capital refers to the private capital invested by bank capital owners to obtain profits from operating banks and monetary capital that is concentrated in banks through various channels. Bank capital can be broadly divided into book capital, economic capital, regulatory capital and qualified capital. Book capital is bank capital that is directly reflected on the balance sheet; economic capital is capital that banks resist against unexpected risks; regulatory capital is the capital requirement imposed by the banking supervisory authority on commercial banks, and is usually used to calculate capital adequacy ratios; qualified Capital is the qualified capital identified by the banking regulator.

1. Bank capital as a source of funds.

First, capital is a source of funding. A new bank needs funds to pay for land, housing and equipment capital investments.

One: Bank capital is generated on the basis of the currency business.

Two: Bank capital consists of two parts, one is cash, and the other is securities.

Three: In addition to bank credit, the movement of bank capital also exists in the form of buying and selling securities. ^[1]

(1) Capital supervision and systemic risk

(I) Generate background and content

1. Generate background:

2

There are two types in the U.S.

Bank capital

China

(I) Main contents of the new "Capital Agreement"

In June 1999, the Basel Committee on Banks proposed a draft of an amendment to the Capital Agreement, a framework amendment to the 1988 Capital Agreement, and proposed three pillars of bank capital supervision (minimum capital standards, regulatory review). with

(I) Definition of Bank Capital

The traditional definition of capital is owner's equity, but in the practice of bank capital supervision, the definition of capital refers to funds that can cover bank losses. In fact, the scope of capital has been expanded to all other financial instruments that can cover bank losses. The pros and cons of this expansion have not yet been forcefully analyzed. As far as equity capital is concerned, there is much controversy over which calculation method should be adopted. The current regulatory capital calculation is the book value method, but more and more scholars have suggested adopting the market value method, which is to use the market value of bank assets minus the market value of liabilities to determine the amount of bank capital. The market value method can accurately calculate the actual capital value of a bank, but the method is complicated and the volatility of capital value increases, which will make it difficult for the supervisory authority to judge the reasonable level of bank capital.

(II) Methods of Bank Capital Supervision

The core question of the bank capital supervision method is whether a unified standard should be formulated and implemented. Many scholars have pointed out that, although there are many defects in the 1988 Capital Agreement, this method has one of the most prominent features, namely simplicity and clarity, which is the characteristic of laws and regulations. The legal requirements must be uniform, testable and comparable, so simple calculations must be used. Even if the internal model method can correctly calculate the bank's risk and required capital, it is difficult to determine it in the form of regulations, and the complex model makes it difficult for the public to judge and compare the bank's capital level.

(3) Effect of bank supervision capital

The effectiveness of bank capital regulation involves two key issues. One is what method is used to test the effect of raising capital standards, such as the correlation between the bank's actual capital level and regulatory capital; the other is what standard is used to test this effect, such as whether it is beneficial to a country's economic growth.

(IV) Prospects of bank capital supervision

The essence is the relationship between the government and the market. This relationship is constantly evolving, so regulatory concepts and methods should also be adjusted in a timely manner.

In a considerable period of time in the future, the review of the bank's internal risk capital model and effective regulatory authorities will be the trend of bank capital supervision, and market constraints will be in a relatively secondary position, because people cannot expect ordinary investors to understand complex models, nor The role of the supervisory authority's agent should be eliminated. The most reasonable should be the methods and standards to promote the stability and economic growth of the domestic banking industry.