Research On The Optimal Allocation Of Credit Portfolio Based On Raroc And Concentration Constraint

As the marketization of interest rate in China is accelerating, banks put more and more concerns on capital adequacy ratio, i.e. how to conduct an effective allocation of capital, which means how to determine reasonable risk limits for its loans. Risk limit is the maximum exposure which is quantified in the Internal Ratings-Based Approach based on the principle of maximization of risk-adjusted return on capital according to portfolio model. Meanwhile, the Basel Committee declared clearly that the concentration risk of credit portfolio is one of the major causes of banking crisis and an important factor of regulations on capital and economic capital. Therefore, a risk limits optimal allocation model of credit portfolio based on RAROC (short for Risk Adjusted Return on Capital) and concentration constraints is of great practical and theoretical value.Although many scholars have obtained valuable research results in the relevant fields, there are still some aspects should be further improved. For example, the estimation of correlation in credit portfolio is subject to condition like the lack of data, not long enough of the period length and difficulties in valuing the proxy variables. Too more assumptions used in the measurement of economic capital result in a lack of accuracy of the model; some parameters in the measurement of portfolio concentration can only be generated by simulation; the viewpoint is too narrow and there is a lack of forward-looking in the study of allocation of exposure limits.Based on the results of existing research, this paper achieved the following findings:(1) A RAROC factor model to measure the relevance of the credit portfolio is constructed to reflect the impact of macroeconomic environment on bank assets.Based on the definition of RAROC, elements which can affect the credit rates are set as the RAROC systematic risk factors. It means that based on the classical theory of Keynes and Hicks, this paper build a RAROC factor model by using four systematic risk elements related to the asset return of banks, which are economic growth, price level, money supply and investment amount according to analyzing IS-LM model, and provide a calculating formula for covariance matrix of credit portfolio. Then this paper brings up an empirical research based on the data from a branch of Bank S and obtains the RAROC covariance matrix and correlation matrix under three dimensions which are credit rating, industry and firm scale of the credit portfolio. (2) According to1448corporate loans of the branch of Bank S and4113corporate loans of Bank X, this paper measures the concentration of the two banks respectively under dimensions of credit rating, industry and firm scale, and a credit portfolio optimization model considering concentration constraints is built under relevant dimensions.This paper designs a combination of concentration measurement module by using VBA program to measure the credit portfolio concentration and changes in certain condition of the branch of Bank S and Bank X. Accordingly, this paper builds credit portfolio optimization models considering concentration constraints respectively under credit rating, industry and firm scale, and conducts a stress test.(3) By conducting an empirical comparison between the models under the above three dimensions and models without concerning constraints of the degree of concentration, this paper is to find the effects of the improved model through comparative analysis from a certain perspective.The main conclusions are as follows:â‘ Under each dimension, whether this paper takes the constraints of the degree of concentration into consideration or not, with the increase of objective earnings set for the bank, the portfolio concentration risk of the bank is always increased, meaning that the allocation of loans at this time tends to be concentrated; meanwhile, the portfolio risk and objective return are positively correlated.â‘¡Under each dimension, the concentration constraints will decrease the bank income moderately.â‘¢whether this paper takes the constraints of the degree of concentration into the consideration or not, the credit portfolio in the middle level rating has the maximum value of RAROC, which means it attracts the banks most; the allocation of credit portfolio weighs relatively large in the industries like wholesale and retail, industrial and real estate; it should be noticed that the current interest rate market is not mature enough, the banks can still enjoy the bonus from the interest rate differential protection policy leading banks to have a more positive tendency to allocate a loan to large enterprise customers. However, under the analysis of firm scale dimension, RAROC is negatively related to the firm scale showing that capital efficiency of small and medium business enterprise customers is much higher than the large ones. So we can expect that with the accelerating of the interest rate marketization, strengthening of capital constraints and a favorable policy, bank's strategic transformation will tilt to SMEs.â‘£Stress test indicates that when the extreme crisis occurs, the credit rating of7borrowers, real estate industry or small business enterprises may bring largest risk to the credit portfolio of banks, which needs particular concern for Bank S. It requires a combination of risk preferences and differences in management strategies to optimize the allocation of credit resources.In short, innovations of this paper include: (1) A RAROC factor model considering a number of macroeconomic indicators is built to characterize the correlation matrix of the loan portfolio returns and examine the impact factors related to the efficiency of bank capital. These macroeconomic indicators include economic growth, price level, money supply and the investment amount, etc.(2) This paper adds the concentration risk as a constraint to the credit portfolio allocation optimization model and conducts related comparative analysis about the optimal allocation of the loan portfolio under three dimensions, which are the credit rating, industry and firm scale, respectively. The results theoretically guarantee bank loans are not overly granted in certain sectors or companies of certain credit rating, and make sure to obtain a satisfactory return on credit portfolio.(3) This paper takes into consideration that bank loan's influence on the contribution rate of economic growth in different industries, regional differences in economic structure and coordination, and it draws a conclusion that an optimized allocation of bank loans can help to promote the regional economic growth.