RAROC Loan Pricing Model Application

As the formal start of china’s "financial One-Two-Five planning and the fast promotion of the interest rate liberalization reform, the competition between our commercial banks would be more fierce. Besides, in order to conform with the details of the New Basel Capital Accord, which requires by the financial supervision authorities, there would be more strict supervision between the commercial banks internal. Facing with the complicated economic environment of both domestic and international, commercial banks as a kind of a particular enterprise, need to pursue the maximum profit, on the other side still need to control the risk rationally, thus they are meeting with unprecedented challenges. As loans be the major business inside banks, how to price it would be directly related to the bank’s profits, risks and market competition, therefore the research of commercial bank loan pricing is a very important practical significance.This paper gives an overview of the theoretical foundation of loan pricing in both domestic and international, combines with the actual situation of the A branch ICBC, deeply analyses the existing problem with the loan pricing of the A brand ICBC, thus initiates a new choice of the loan pricing-The RAROC, and combines with debt and customers, this paper offers the specific business application and implementation of recommendation on researching of the RAROC. The research refers a lot of the internal data in A branch, selects the instance and material major related with the company loans, hoping the research of RAROC would provide the practical application in daily work and other commercial banks.The main innovation of this paper is that it initiates the concept of customer RAROC, and combines the loan RAROC with the customer RAROC during the loan pricing process. The RAROC pricing model introduces risk-adjusted function and measures the risk-adjusted return on capital, it represents the advanced conception of risk management, which takes the influence of expected loss and unexpected loss on loan into account. The customer RAROC is on the basis of the RAROC pricing model, that initiates the management conception of "focus on the customers". Different with the current loan pricing methods in A branch, which combines with the loan RAROC and the customer RAROC, therefore would help A branch to take the advantages in the loan marketing and risk management, and also points a brand new way of A branch on reform and development during the increasingly fierce competition. In short, by combining the practical experience from my work in ICBC and with the theoretical knowledge during MBA studying, I am trying to research the loan pricing models of the commercial banks which represented by the A branch, on the purpose of choosing the right loan pricing models applied to commercial banks. As the lack of my theory and practical experience, there must be a number of deficiencies in this paper, I am happy to receive all the correction of all the experts, and i would continually study in my future work with a humble heart.