Risk Capital and RAROC Following P. Jorion, Financial Risk Management Chapter 25
Daniel HERLEMONT
Introduction The methodologies described so far have covered market, credit and operational risk Methods have been defined to measure the amount of capital required to support the bank's financial risks. This capital, also called risk capital, is basically a VAR measure Each activity should provide sufficient profit to compensate for the risk involved. Pricing should account not only for expected loss but also for remuneration of risk capital some activity may require large amount of risk capital which in turn requires higher returns The Risk Adjusted Return on Capital (RAROC) measures is to evaluate and compare the economic return of business activities. RAROC is also related to concept such as shareholder value analysis and Economic Value Added. Past measures was Return on Assets (ROA) Return On Equity (ROE) None of these measures are satisfactory as they ignore risks ... Daniel HERLEMONT
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Daniel HERLEMONT
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Daniel HERLEMONT
RAROC Part of a family of Risk Adjusted Performance Measures (RAPM)
3 steps Risk Measurement Capital Allocation Performance Measurement
