RAROC Based Capital Allocation In Commercial Banks

Budget Constraint is becoming one of the most important problems in Chinese commercial banks. The Economics Capital Budget management capability concerns about bank's survival and society's stability. Results of similar study indicate that the essence of bank's crisis results from assets misallocation. However, with reference to Chinese commercial banks, the administrative interference plays a key role in bank operation, and few banks have capital management consciousness. Along with the Opening up of China's Financial Industry as the requirement of WTO, much attention is given to the capital allocation. Because of the late starting of capital management, the research emphases are still on the introduction, and there is not enough consideration paid to the applicability.The thesis begins with the analysis of existing studies puts forward allocation principle in details, and adopt RAROC as our research method. With reference to the character of China's commercial banks, the paper uses incentive compatibility function to represent the operation of bank custom managers checking system. With reference to the Weak-form Efficiency of China's stock market, the thesis puts forward the assumption that the capital can not be raised instantly. Then the paper gets some major results under the frame of maximizing the bank's value, based on the analysis above, such as the optimal risk level, the optimal equity volume which should be raised, the most important parameter, the RAROC hurdle rate. The determination of the hurdle rate is helpful for the application of RAROC based capital allocation. In the end, the thesis illustrates the conclusions in theory by giving out an example.