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We've helped our corporate clients develop their own RAROC models," said Mark Webster, at partner at consultancy Treasury Alliance Group.
RAROC = (Unrealized gains and losses /Days)/(Value at risk /t).
Pitfalls in the Application of RAROC in Loan Management, The Arbitrageur, Spring, 21-27.
It is proposed for settling these issues the development of a model that will measure trade credit extension profitability adjusted to credit risk and, to this end, the Theory of Restriction (TOC) profitability concept and RAROC model (Risk-Adjusted Return on Capital) will be adopted for its calculation.
Its recently developed Web-delivered product is called P&C Raroc, which allows insurers to see how much capital is needed to support a company and how much is actually available.
With bank capital allocated under the more disciplined RAROC approach, company bank groups get smaller, the study says.
With respect to market risks, methodologies such as Bankers Trust's RAROC and J.
Proponents of RAROC (risk-adjusted rerum on capital) and similar mechanisms argue that, on correctly risk-adjusted bases, tier two capital levels generally should be around 5 percent.
But one thing is clear: in many risk management situations, the relevant horizons are long--certainly longer than just a few days--an insight incorporated, for example, in Bankers Trust's RAROC system, for which the horizon is one year.
Moreover, to improve RAROC and continue to attract shareholder backing, banks need to deploy capital in the most produc-tive ways possible.
In the late 1970s, Bankers Trust developed RAROC as a performance evaluation tool (Froot, Stein 1998).
RAROC is a key step, but the basis for this is strong ratings capabilities and for many banks that is the starting point.
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