| RAROC (Risk Adjusted Return on Capital) system is the core way of Enterprise-Wide Management, which is core method used by international banks in business management. RAROC system turn future expected losses caused by risk into currently cost. The denominator of the RAROC equation measures the capital required to absorb the unexpected loss. RAROC makes revenue related with risk directly through measuring risk-adjusted return on capital. RAROC system supplies a standard criterion for business decisions, development strategy, risk management and performance evaluation in all level of bank.After dozens of years' development, many advanced foreign banks already formed a complete capital management system for capital distribution, loan pricing and performance appraisal, the core of it is RAROC. However, banks in China have just started to make initial efforts for such a system.For a long time , domestic banks have always paid great attention to asset and debt management, yet with negligence to capital management. There are some common problems that severely affected the development and competitive ability of commercial banks, including low capital adequacy ratio, simple capital structure, irrational capital formation and little profitability.At present the key management of commercial banks in China needs to be switched from traditional assets and debt to a total risk appraisal. A well-planned economic capital can resist unexpected risks, determine the banking structure and development strategy by risk-profit property of assets, fulfil the goal of maximum value under certain risks - the core of economic capital theory is RAROC.Based on RAROC, combined with some research to economic capital distribution, loan pricing and performance appraisal of commercial banks in China, the author puts forward a banking performance appraisal index system with the application of RAROC in the article, and give his suggestions and comments on how to face up the existing RAROC-related problems. |
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