A Study On The RAROC-based Loan Pricing Of Commercial Banks In China

As China gradually promotes interest rate liberalization reform and permits foreign-funded banks to undertake RMB banking operations and conforms to the New Basel Capital Accord, Chinese commercial banks have to be faced with a market environment that is fierce in competition and strict in supervision over both internal & external risks and capital. It has become a major challenge for commercial banks how to reasonably loan pricing on the basis of reasonable risk-profit ratio and in accordance with the stipulations of the New Basel Capital Accord. Therefore it's of great theoretical and practical significance to research on loan pricing of commercial banks.This paper begins with the theoretical foundation of loan pricing of commercial banks, introduces the three overseas traditional models of loan pricing and the latest development of these models. In light of the reality of and existing problem with the loan pricing of our country's commercial banks, the paper initiates the method of loan pricing on the basis of RAROC, compares the method and overseas traditional pricing methods with our country's prevalent pricing methods, and analyzes the advantages and foundation of the method of loan pricing on the basis of RAROC. Then, on the basis of the quantitative analysis of the theory and model of the said method, the paper initiates both the concept of customer RAROC and the model of pricing loans in light of sole loan RAROC and customer RAROC, and finally put forwards suggestions on the actual operation and application of the said method by our domestic commercial banks.The main innovation in this paper is that it initiates both the concept of customer RAROC and the model of pricing loans in light of sole loan RAROC and customer RAROC on the theoretical basis of loan combination pricing. The ROROC pricing model introduces risk-adjusted function and measures the risk-adjusted return on capital. It also takes into account the influence of expected loss and unexpected loss on loan, and represents the advanced conception of risk management. The concept of customer RAROC initiated on such basis embodies the idea of "Focus on Customers". And the model of pricing loans in light of sole loan RAROC and customer RAROC is totally different from all the previous loan pricing methods of commercial banks. Therefore it helps commercial banks to take more initiatives in loan marketing and risk management, and serves to guide commercial banks in facing up to ever-increasing industrial competition to some extent.