Reserach On Loan Portfolio Management Of Chinese Commercial Bank Based On Raroc Maximization

The fundamental principle of loan resource allocation for commercial bank is to maximize the commercial bank’s return with minimum cost and risk. Because the loans of commercial bank are scarce and valuable, the optimization of loan portfolio is the key method to improve its ability of credit operations and risk management. The famous mean-variance (M-V) model which was introduced by Markowitz in1952provided the basis for the modern investment theory. Furthermore, it supplied the theoretical basis for commercial bank to realize the operation goals.Based on the modern investment theory, this paper considers the credit risk theory, economic capital management and risk return model. The methods such as mean-variance model, structural equation model, nonlinear programming, multi-objective programming, optimization theory and matrix theory are used to study the optimization of loan portfolio for the credit risk management of commercial bank. The main results are in the following:1. Due to the drawback of existing models, a new default probability model is established based on joint prediction method. As the core content of IRB for commercial banks, the credit risk measurement is the very important basic work in credit risk management. With the present results of a stronger ability to explain and a weak ability to predict, this paper gives detailed analysis of the modeling idea and core principles of Altman’s system. Through the performance of non-financial factors, a new default probability model is established based on non-financial factors and financial factors.2. The measurement and structure of RAROC model for commercial bank are studied. From the perspective of how to balance the risk and earning in business development process, the different RAROC (Risk Adjusted Return on Capital) measurement models are detailed for Chinese commercial bank under different management purposes. The problems in calculating RAROC such as data extraction, matching, apportionment and provisioning are discussed. Furthermore, the key factors of the system constructing are presented based on measurement model, foundation database and the business sector support.3. The objective function of optimizing selecting for loan portfolio model is analyzed. First, with the credit customer as the studying objective, the optimization model of loan portfolio is established. Then, based on the maximum loan return and gross return, the selection of objective function is analyzed through the optimization model of loan portfolio. According to actual operation data of commercial bank, the result shows that the optimum choice of bank’s credit management is to consider the maximum gross return as its management objective.4. A multi-objectives optimization management model of industry loan portfolio is studied based on long-term value maximization of commercial bank. In view of the commercial bank’s risk tolerance and the capital utilization ratio, capital efficiency is used to build a multi-objectives optimization management model of industry loan portfolio. This model takes account of the comprehensive income of loan portfolio, risk and capital efficiency by setting some constraints, and particle swarm optimization is presented to analyze this management model. A numerical example is given to obtain the optimal weight with the maximum risk adjusted return on capital and the minimum risk.5. The loan loss insurance and its application in loan portfolio. According to the New Basel Capital Committee commends (BⅢ), the domestic listed banks need to finance frequently from capital market as it will restrict the new loans of bank if there is no added capital. The loans of commercial bank are scarce and valuable because of the hard constraints of capital adequacy ratio. A new way of releasing economic capital based on the cooperation of bank and insurance company is presented. The economic capital which is released by loan loss insurance can be recycled, and the bank will obtain new virtual capital to develop the credit business. Furthermore, this method is applied to the management of loan portfolio.6. The branch institutions of Chinese commercial banks have their own natural endowment, customer resources, personnel quality and management culture. Because of hard constraint such as administrative measures, there exists the phenomenon of resources misallocation and low effectiveness inside commercial banks. From the view of soft constraint, this paper studies the internal marketization management of commercial banks to optimize corporation loan portfolio, and it also can promote the delicacy management of commercial banks.