On Use Of EVA In China's Commercial Banks

State-owned commercial banks compete for public offering through the Shareholding Reform , while other joint stock banks also are eager to seek to go on the market. Going pubic is not the goal. The most important thing for banking reform is to improve the banks' corporate governance and management mechanism. Under the pressure of capital market and internal development request, the banks'management will strive to improve internal management mechanism and create wealth for the shareholders. EVA is a value management tool, widely used by international leading banks, which will bring great development in banking management and become more and more popular among banks all over the world.The core of EVA method is to establish a performance index for management through adjusting net profit to deduct all capital cost. This method can eliminate misleading financial information which due to different accounting policies, and has considered the cost of shareholder's capital. The economic environment creates EVA method. EVA system includes Measurement, Management System, Motivation and Mindset(4M System).EVA is a integrate system, which based on strict theories, such as opportunity cost theory, enterprise value theory and principal-agent theory and so on.The classical EVA model is based on the traditional manufacturing enterprises. According to banking industry's characteristic, especially its inherent high risk character, this dissertation emphasizes the necessity of EVA model transformation of applying in commercial banks and proposes an adjusted EVA model which can precisely show the economic value added after deduction of risk factors for commercial banks. The model based on the economic capital theory, applies a new method to calculate the cost of capital based on economic capital, using risk adjusted net profit instead of net profit after tax, to fully consider risk factor.Based on existing research and the practice, this dissertation establishes a bank value management system though EVA method, including measurement, management system, motivation and mindset. Performance measurement is the foundation of EVA method and is the breakthrough point for commercial banks applying EVA method currently. This dissertation elaborates the necessity of introducing EVA performance measurement for the commercial banks and proposes new models to establish performance indexes by branch, by division and by product. This dissertation also explains how to apply EVA management system, motivation and mindset in commercialbanks and forecasts the prospect of EVA application on China's commercial bankingindustry.