A Study On The Risk Adjusted Performance Measurement Of Commercial Banks

The purpose of the performance evaluation is to maximize the market value with the minimum of resources and capital input, and it is the essential of corporate performance management. Accordingly, commercial banks also assess the outcomes of each business unit, all bank branches and employees through their own performance evaluation system and make compensation plans with the result.But if commercial banks conduct business performance evaluation only focusing on profitability such as general companies, they can easily neglect risk management. As a result of this, it can cause negative side effects on bank’s financial soundness, and even there is a possibility of bank failures, in that case it can bring the financial crisis that threatens the national economy. Therefore, Chinese commercial banks already acknowledged the drawbacks of the conventional performance evaluation method such as ROE and the importance of the risk management after several global financial crises and currently try to adopt risk-adjusted performance measurement(RAPM).RAPM is a kind of balanced performance evaluation model between profitability and risk management. This model connects the profit with the risk exposed to specific transactions, and then measures risk-adjusted return on capital(RAROC). First of all, this paper starts with the description of a basic knowledge in RAPM, and conduct a study on the measurement of RAROC among RAPM. Secondly, 19 Chinese commercials bank’s financial data regarding return on equity, core capital adequacy ratio, total assets growth rate, non-interest income to total income ratio and risk-weighted assets from 2008 to 2014 will be collected. Based on this panel data and calculated RAROC as an independent variable, regression analysis is used to testify the influence of RAROC on Chinese commercial banks in terms of profitability, soundness, asset growth and profit structure. As a result of this, the correlation of RAROC with commercial bank’s major management index is verified and also suggestions for RAPM are made on the basis of an empirical analysis.RAPM can help commercial banks to reach the goal of both profitability and stability of the bank from the perspective of regression results. Although RAPM is not closely related with bank’s asset growth, it has the advantage of qualitative development for the profit of each commercial bank. Accordingly, the adoption of RAPM system in accordance with each bank’s business situation is absolutely necessary to ensure sustainable growth for commercial banks.Besides, a prerequisite for an effective operation of RAPM system is to build risk management culture all over the bank and to make obvious and clear risk measurement system. By doing so, the effectiveness of RAPM will be definitely improved. In addition, a wise and proper choice from many indexes in RAPM must be decided based on national economic conditions and business situation of each bank to optimize both profitability and stability of commercial banks.