Raroc Study On The Model And Its Application In Evaluation Of Performance Of Chinese Commercial Banks

Decllth,2006 is a day destined to be recorded in China's financial annals. From this date, China will fulfill its WTO commitments fully, China's banking sector will open to foreign-funded banks fully, giving foreign banks national treatment. Hereon, foreign banks and domestic commercial banks will compete in the same arena fiercely. Faced with the foreign banks of advanced management technology and modern management philosophy, domestic commercial banks will be confronted with impacts and challenges from conception,system,technology,product,profit generation and so on. In the context of such conditions, the urgent problems must be addressed by domestic banks is how to take the most effective means to improve their own competitiveness.From the development process of western commercial banks, enhancing the capacity of performance evaluation and analysis is an effective method to improve commercial banks' competitiveness. And RAROC, which is risk adjusted return on capital is a core technology means used by international advanced commercial banks to evaluate and analyze performance. It changed the traditional pattern which focused on asset earning rate or equity book earning rate to investigate operating performance and to carry out performance management. RAROC quantifies the expected loss brought by risk as current cost and consider reserving capital for the biggest risk that may happen, adjusting current earning directly, measuring the risk-adjusted return, making banks' returns linked to risks, providing crucial and unified standard basis for business decision-making, development strategies, performance appraisal, goal setting and many other aspects of operating and management. It becomes the core and most effective way to enhance banks' competitiveness, which is recognized by both today's financial theoretical circles and practical circles.Based on elaborating the basic theory of RAROC and how to measure every parameter relative to RAROC, this paper discusses the applying of RAROC to national banks' performance evaluation is of great significance for national banks to improve operating and management level and competitiveness. But because of lacking the ability of pricing interior funds transfer scientificly,sharing operating costs according to activity-based costing and measuring credit risks for a long term, it needs a long period for national banks to establish t RAROC performance evaluation systems. Under these circumstances, the author puts forward pertinent solving strategies for national banks to establish the RAROC performance evaluation systems of modern sense, on the foundation of researching national banks' constraints of carrying out the performance evaluation systems based on RAROC. In the concluding part of this paper, the author further stresses the special circumstances of China's banking industry, pointing out establishing the RAROC performance evaluation system is a gradual process, one step is not quite feasible.