Speaking, in business enterprises, risk is traded off against benefit. RAROC is defined as the ratio of risk adjusted return toeconomic capital. The economic capital is the amount of money which is needed to secure the survival in a worst-case scenario, it is a buffer against expected shocks in market values. Economic capital is a function of market risk, credit risk, and operational risk, and is often calculated by VaR. This use of capital based on risk improves the capital allocation across different functional areas of banks, insurance companies, or any business in which capital is placed at risk for an expected return above the risk-free rate.
RAROC system allocates capital for two basic reasons:
1. Risk management
2. Performance evaluation
For risk management purposes, the main goal of allocating capital to individual business units is to determine the bank's optimal capital structure—that is economic capital allocation is closely correlated with individual business risk. As a performance evaluation tool, it allows banks to assign capital to business units based on the economic value added of your unit.
Saturday, October 11, 2014
Well, my friends, the time has come
Raise the roof and have some fun
Throw away the work to be done
Let the music play on.......Feel it in your heart and feel it in your soul
Let the music take control, we going to
Parti', liming, fiesta, forever
Come on…