Application of Raroc Model in Bank System Literature

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application of RAROC model in bank system literature

1.introduce
The loan pricing based on RAROC is a comprehensive risk pricing method. RAROC takes safety and profit as the goal of the banking business, matching the price and dynamic risk of the loans, reflecting different treatment between the difference of risk degree of loans. This is conducive to the optimization and the rationalization to risk of bank loans. This paper focused on the improvements of RAROC Pricing and its application at our country's commercial bank. In the western commercial bank loan pricing, RAROC in recent years has been widely adopted, it is a base Pricing methods in the economic capital and default rates. To the security of the banking business, the profitability target, considering the bank's cost of capital, operating expenses, the expected loss and the risk premium. Its advantages:Give full consideration to the different degree of risk of each loan business, loan pricing is closely related to their degree of risk,Loan pricing and risk match, reflecting the differential treatment of loans to customers of different risk levels,Certain extent to solve the single pricing conditions, adverse selection of loans to customers (adverse selection) problem, enabling Bank loan customers to optimize and rationalize the risk-Foreign RAROC theory is more focused on how Application of RAROC management of credit risk and economic capital in preparation. 2.literature review

NealM. Stoughton and Josef Zechner insist the RAROC and EVA based on capital budgeting is the Foundation for financial institutions managing optimal capital configuration. Under asymmetric information condition, for an Single-sector financial institutions existing outside management costs, they leads to an optimal capital configuration framework, the framework is applicable to multi-sectoral financial investment diversification Institutions, they believe that all financial institutions have the cost of external...
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