The standard to measure the value of commercial banks is multi-dimensional. It includes measures of the stock value, social value, enterprise value and human capital value. Value management of commercial banks seeks to unify and balance all aspects in the operational process in a relatively stable system which can achieve sustainable growth. This article looks at the role of performance, capital, risk, market and human capital management for the value management of commercial banks.
Performance management plays an important role in the value management of commercial banks
The function of performance management of commercial banks can be divided into three levels. The first is the regulatory performance evaluation system. Through qualitative and quantitative analysis of the financial statements of the bank in the previous year or the base period, the bank regulatory authority conducts guidance and management evaluation of the operational behavior of the bank in the next year or the base period, such as the performance evaluation system issued by the Ministry of Finance or the China Banking Regulatory Commission. Second, the performance evaluation system of intermediary institutions, such as banking unions, financial authorities, professional evaluation institutions (such as Moody's, Standard & Poor's and other rating agencies) and reputable investment institutions based on the information provided by banks or publicly disclosed. The third is the performance evaluation system of commercial banks, which is a performance evaluation system established by the board of directors of commercial banks to direct the operational management, or by the superior banks to the subordinate banks of commercial banks. Although the initiators and positioning of performance management at these three levels are different, they all play an important role in improving the operation and management of the commercial bank by controlling risks and enabling improvements in value creation.
Capital management plays an important role in value management of commercial banks
Bank capital can be divided into book capital, regulatory capital, and economic capital. Book capital is the total amount of capital actually paid to the bank as registered capital, which is contributed by shareholders. It includes not only the capital actually paid once or for many times, but also the capital reserve and excess reserves formed by the bank's profits, as well as the balance of all kinds of debts to supplement the source of capital borne by shareholders. Capital management is crucial to bank value management. From the perspective of the role of book capital management, banks must have a certain amount of capital to carry out business activities. To start a commercial bank you must first have adequate capital, only in this way, can the bank dilute and compensate for the risks that depositors may encounter. Adequate capital is also needed to strengthen the ability of bank to manage risks and returns by establishing the proper management mechanisms and to balance of the interests of shareholders and managers.
Regulatory capital is the minimum standard required by bank regulators for the amount (rate) of capital occupied by each type of business in the business activities of commercial banks, including the amount (rate) of capital occupied by a single business and the total amount of capital occupied. Regulatory capital is the standard regulatory requirement of capital adequacy which aims to put all commercial banks on a fair playing field with adjustments for the individual bank risk profiles, profitability and rate of return and so forth. Capital supervision is needed, not only for regulatory compliance, but also so investors and society can get a fair and clear picture of the each bank. The establishment of the capital supervision system of China's commercial banks is implemented as part of the commercial bank reform and development process. An important step in this process was recognizing and joining the Basel Accord and accepting its supervision standards for commercial banks.
Economic capital is derived from the capital accounting method and is established internally by commercial banks to decompose regulatory capital requirements into each business segment and responsible position in their own business activities. Economic capital management also plays an important role in the value management of commercial banks, reflecting the requirement of capital conservation. In other words, according to the risk weight and operational capital standard set by the regulatory capital, the operational capital standard is set for its own asset business and other risk businesses in accordance with regulations to simulate the total amount of operational capital, which is stricter, more systematic, and more detailed than the regulatory capital standard. On this basis, the economic capital budget plan is formulated and implemented through the plan, which is highly consistent with the expected direction of book capital and regulatory capital and forms a coordinated development goal.
