RAROC and profit planning
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What does RAROC stand for in banking?
RAROC stands for Risk-Adjusted Return on Capital. It measures the return on capital after adjusting for the risks undertaken by a bank or business unit.
What is the full form of RARORAC?
Risk-Adjusted Return on Risk-Adjusted Capital
How is RAROC calculated?
RAROC is calculated as Risk-Adjusted Net Income divided by Economic Capital. The formula is: RAROC = (Revenue – Costs – Expected Losses) / Economic Capital.
What does profit planning in banks primarily focus on?
Setting income, cost, and capital targets for future periods
What is the primary purpose of RAROC in bank management?
RAROC helps banks assess the profitability of business lines on a risk-adjusted basis, enabling performance comparison across different units with varying risk profiles.
Which risk types are typically included in economic capital calculation?
Credit, market, operational, and liquidity risks
What is Economic Capital in the context of RAROC?
Economic Capital is the amount of capital a bank estimates it needs to cover unexpected losses at a given confidence level, typically 99.9%, over a one-year horizon.
What is Risk-Adjusted Return on Capital abbreviated as?
RAROC
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