Methodology for calculating economic capital and its adequacy ratios in a bank

Abstract

Purpose: the Purpose of this work is to determine the economic capital and its adequacy standards based on the calculation of unexpected losses for each type of risk in the Bank. To achieve this goal, the article considers the methodology for assessing economic capital based on the risks that pose the greatest threat to the financial stability of a commercial Bank. Discussion: in modern conditions, taking into account the lessons and consequences of the global financial crisis, in the financial and banking services markets, the regulator sets increasingly high requirements for the management and capital management system in credit institutions. In this regard, the number of banks that strive to improve the risk management system in order to bring it in line with the best foreign practices is constantly increasing. However, only some Russian credit institutions have the necessary sources (methodological, organizational, informational, and human resources) for calculating economic capital and its adequacy standards. And only a few (mostly subsidiaries of major foreign banks) are able to make payments in accordance with international best practices. Most Russian credit institutions must take more than one step before fully and correctly calculating economic capital, as well as allocating it to business units. Well-designed risk management processes play a significant role in improving financial stability. In this regard, all risks must be identified and evaluated, and the internal capital to cover the most significant of them must be calculated. Results: the algorithm and calculation of the amount of unexpected losses for the main risks (credit, market, currency, operational, interest rate, liquidity risk) are Presented. The result of the work is actions if the planned capital is not sufficient to cover all expected and unforeseen losses.