RAROC Model In Commercial Bank Risk Management

Nowadays, with the rapid development of the economy, the financial sector has been anunprecedented expansion of opportunities, but at the same time，in which， there are manyhidden dangers. In recent years，the risk management in the financial sector has been a hottopic, the issue of risk management in the banking industry reflects more obviously. Due tothe nature of the banking industry itself, it has a lower proportion of the drawbacks of its owncapital, so the banking sector is the use of customer deposits, others borrowed funds andenterprises to carry out operations management, personal and business loans are alsoincreasing the activities of these belong to financial risk business. This makes the commercialbanks to take in the course of business are significant risks. While the banking industrycontinues to develop new financial products, providing customers with new financial services,but this can’t completely avoid risks. So we need a more sophisticated banking riskmanagement techniques to effectively improve these problems.RAROC (Risk Adjusted Return on Capital) that the risk-adjusted return on capital, is the70s of last century, the American Bankers Trust (Banker Trust) put forward, it is the firstmeasure to be applied to the credit risk of the bank ’s credit portfolio. After30years ofcommercial banks on the development and application of RAROC model, has formed acomprehensive risk management system. The current status quo of China’s banking industrypoint of view, this model can be expressed more clearly linked to the loss of various bankingservices distribution, and, for the more complex measure of portfolio risk assets, it has abetter advantage. RAROC risk management models can also use the capital budget for areasonable allocation of capital, the performance appraisal react with the same period the costof risk and loan pricing based on economic capital, risk management and ultimately achieve acombination of income and commercial banking purposes.In this paper, I analysis the risks faced by commercial banks, leads RAROC modelsuperiority in risk management. In ZS Bank, for example, cited the practical application ofrisk management techniques in the banking industry, pointed out the feasibility and necessityof RAROC models in China’s commercial banks’ risk management. Banking is also made inthe implementation of RAROC risk management techniques require large amounts ofhistorical data as well as the bank’s internal IT systems to support a more comprehensiveissues.