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The research and application of RAROC and performance evaluation of China's commercial banks.

Author: LiuHu
Tutor: ZhangXianMing
School: Southwestern University of Finance and Economics
Course: Finance
Keywords: RAROC commercial bank performance measurement economiccapital credit risk risk management
CLC: F832.33
Type: Master's thesis
Year: 2013
Downloads: 139
Quote: 0
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Abstract


In the last20years, there has been remarkable changes on the commercial bank management. The focus of commercial bank management transforms from the traditional balance sheet management to overall asset management characterized by risk-metric and risk control. In this situation, enhancing the ability of risk estimation is the key for domestic bank to improve their core competitiveness.Nowadays, RAROC (Risk Adjusted Return On Capital) which is the most widespread method applied by western commercial banks, is main improvement to traditional financial analytical method.In my paper, I first introduce the important foreign and domestic literature regarding RAROC. Next, I discuss the relationship with commercial bank performance evaluation using some instance. In the third part, I introduce the current situation of performance evaluation in china and the difficulties of introducing RAROC, the solution to these difficulties are also involved. The last part is conclusion.When introducing the parameters involved in RAROC, I follow the order: income, economic capital and operation cost. The prevailing measurement of economic capital is internal capital transfer pricing method, I emphasize the expected loss and unexpected loss parameters and discuss the factor which influence them, the formulation to compute are also provided. What’s more, I analyze the conception of unexpected loss quantitatively and qualitatively, base on which I discuss the economic capital intensely, from its origin to its function. I also compare the economic capital, book value of capital and Supervision capital. At the last part of this chapter, I use a case to study RAROC and ROE、ROA, and justify the advantage of RAROC over another traditional parameters.In china, it takes a lot to do to establish the complete system of RAROC performance measurement provided the current situation in domestic commercial bank. Provided that, I give some suggestions, from adopt internal capital transfer pricing method to establish the society credit system.In addition, this paper also creatively puts forward that commercial Banks must realize the limitation of the RAROC framework. After all, it is only a tool, a program that helps to help to make the right decisions, and can’t really replace real managers. So the domestic commercial Banks rely on RAROC business performance evaluation of reality at the same time to combine the present situation of the domestic commercial Banks, RAROC new way of measuring innovation and discovery. Combined with the current index of some commercial Banks use RAROC technology, put forward the innovation performance model-find the RAROC of myself". Which should be in the original foreign theory and practice on the basis of bold innovation, to find suitable for the current domestic commercial Banks in China the status of the new performance appraisal system.

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CLC: > Economic > Fiscal, monetary > Finance, banking > China's financial,banking > Financial organizations, banks > Commercial banks ( specialized banks )
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