Research On Loan Pricing Of Commercial Banks In China Based On RAROC Model

The growing focus on risk has urged more and more commercial banks seek to improve their ways for loan pricing, the core of modern banking management helping to meet the requirement of profit, security and liquidity in banking operation, since the world economy has already entered the post-financial crisis era. With the development of financial innovation and the popularization of the New Basel Capital Accord, interest rates have been widely used in macroscopic readjustment and control, requiring the strategy and mechanism of loan pricing to be adjusted accordingly to meet the new marketing standard. Therefore, it is necessary to find a proper pricing mechanism to price the loan and make a balance between risk and profit effectively and accurately, thus promoting the development of loan pricing management of commercial banks in China.Recently, the RAROC model comes to be proved more applicable in modern financial market for its risk-oriented perspective that it not only considers the cost of funds but also takes both the expected and unexpected loss for consideration, establishing a comprehensive risk-measuring system for loan pricing. After a short review of literature and principles, the paper analyses the deduction of RAROC model from different aspects and focuses on the measurement of capital risk and risk-adjusted return with the empirical method before a readjustment on the original model with the consideration of contribution from customers. Some proposals are also provided to improve the development of loan pricing of commercial banks in China.