Empirical Study On The Loan Pricing Of Domestic Commercial Banks Based On RAROC Model

In July 2013,The People's Bank of China(PBOC)fully liberalized the control of loan rate.Commercial banks of China can price the loan themselves,which has put forward higher requirements on the pricing capacity of commercial banks.At the same time,the credit business of commercial banks in China is facing increasing competitive pressure.Multi-level capital market improves constantly;the scale of shadow banking expands quickly;internet finance(ITFIN)develops rapidly.All above have formed a substitution for credit business.What's more,private banks are allowed to build and operate and the investment and financing channels of enterprises and individuals are broadened,which make adverse effects on the credit business of commercial banks.With the financial brakes of deposit and loan interest rate have been taken off by PBOC,it can't avoid the competition in the price of deposit and loan products from peers.Traditional mode of loan pricing,which is rough,is no longer suitable for the needs of the new environment.The China Banking Regulatory Commission has clearly pointed out that commercial banks should study to benefit from' the pricing in the 2015 annual report.Loan pricing ability has become an important means of competition in commercial banks,and the necessity and importance of the research on loan pricing methods are significantly strengthened.Since 2011,non-performing loan ratio of commercial bank in China rises,which increases the risk cost.Under the circumstances of the decline in the profitability,the effective control of the risk cost is very important.And the critical part of loan pricing is to evaluate the borrower's credit risk and get a reasonable interest rate compensation for bearing the risk.Therefore,it is important to strengthen the research of loan pricing so that commercial banks can effectively control of risk cost.In January 1,2013,China began to implement the "commercial bank capital management approach(Trial)",which strengthens the commercial bank's capital regulation,and hence there is need to fully consider the impact of capital requirements on loan interest rates.To sum up,it is important to strengthen the research on loan pricing so that commercial banks can enhance the rationality and accuracy of the loan interest rate,competitiveness of commercial banks and reduce the rate of non-performing loans.This paper firstly summarized the traditional loan pricing methods,and analyzed their advantages and expounds the defects in the new era.Secondly,the paper introduced RAROC loan pricing method,which is the application of RAROC system in the field of loan pricing.The exploration of the RAROC system began in 70 years in twentieth Century,and it was successfully used in 90 years.Then it was widely used in developed countries.The original intention of the research is to improve the performance evaluation and the rationality of capital allocation.The basic idea of RAROC model is to use revenue of offset the expected loss and employ economic capital to absorb unexpected losses,which stresses that the final compensation effect of economic capital.The elements in the RAROC loan pricing formula include the expected loss,economic capital,capital costs,operating costs and objectives of RAROC,etc.Among them,the expected loss and economic capital are the function of expected default frequency(EDF).This paper uses the KMV model to estimate the EDF.KMV model believes that,on average,market participants are difficult to beat the market continuously,which does not require the market to be perfectly efficient.The attraction of the model is that it not only has a solid theoretical foundation,but also its relevant parameters are functions of the observed variables.The model uses stock transaction data of listed companies to calculate the EDF,which is forward-looking.The economic capital is estimated through the asymptotic single risk factor(ASRF)model which is the theoretical basis of the internal ratings-based approach in credit risk of the Basel Committee.For an individual company,ASRF model treats yield rate as a function of the systematic risk factor and idiosyncratic risk factor.This model refers to the idea of Merton model that in a certain period of time,debtors will default if the value of asset is less than critical value.In the Merton model,we can obtain the EDF once the critical value of default is known,and the EDF is linked with the threshold of default through normal distribution.In turn,when the average default rate of a certain grade is known,the critical value of the default can be obtained by solving the inverse function of the normal distribution.Finally we can derive the calculation formulas of economic capital.Then the classic RAROC loan pricing formula is improved from the perspective of opportunity cost,in order to avoid the malign competition of loan business to a certain extent.Next,the paper selected 56 loan samples from Chinese bank loan research database of listed companies database provided by CSMAR according to certain principles to do empirical analysis based on improved RAROC method.When predicting the EDF,the paper uses GARCH model to predict the stock return volatility,default point is determined referring to the approach used by KMV Company.Finally,the relevant policy is recommended,including the strengthening measurement of the borrower credit risk,improvement of the database construction,strengthening management of economic capital,reasonably setting the targeted RAROC value and setting a reasonable repricing cycle.The innovation of this paper is to improve the original loan pricing formula based on the perspective of opportunity cost?What's more,currently,RAROC loan pricing method compared with the traditional pricing method has a comparative advantage,regarding to increasing competition among commercial banks,the rising non-performing loan rate,the increasing pressure of capital appreciation and tightening capital regulation.And hence it is feasible to promote of RAROC pricing method in China.