Capital Allocation and Performance Management
About the Lecture
The lecture Capital Allocation and Performance Management by Edu Pristine is from the course Archiv - Operational Risk. It contains the following chapters:
- Capital Allocation and Performance Measurement
- Economic and Regulatory Capital
- RAROC / EVA Calculation
- Capital Attributed to Credit, Market and Operational Risk
- Capital Change for Market Risk and Credit Risk
- OP Risk Capital Attributions Challenges
- Loan Equivalent Approach to Calculate RAROC
- Second Generation RAROC Approaches
- Adjusted RAROC
- Concept Checkers
Author of lecture Capital Allocation and Performance Management
Edu Pristine
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Excerpts from the accompanying material
... Measure that standardizes performance measurement for different transactions. It incorporates economic capital attributed in the denominator (grain facility level) for the analyses. RAROC measure requires revenue inputs from Funds-Transfer-Price inputs, Cost Allocation ...
... The standards ensure that there is enough capital in the banking system. The economic capital held by most institutions is more than the regulatory capital. Economic capital is important from the perspective of the firm's shareholders. The amount of economic ...
... $80 million loan, calculate the RAROC. Gross revenue = $6 million, Interest expense = $4 million, Return on invested economic capital ...
... the VaR is multiplied by a multiplier (usually around 3) to get to the regulatory capital number. For operational risk capital attribution banks need to develop ...
... arises due to interest risk and is called the gap risk where there is a mismatch between a bank's interest-rate-sensitive assets and interest-rate-sensitive liabilities. Credit risk is the risk of loss associated with change in factors that affect credit quality of an asset. ...
... if the maturity is constant then the capital factor will increase with decrease in credit quality. Credit Risk Capital Charge = Capital Factor ...
... There are very few internal data points available to build the loss distribution. ...
... The general approach for calculating the RAROC capital for non-loan products is ...
... business unit is above the hurdle rate then the business adds value to the firm. However this usually leads to a decline in shareholder value. In the first-generation approach RAROC is compared to the firm's ...
... , then there has to be an adjustment made to the capital structure by including more capital. In adjusted RAROC calculations new capital structure ...
... RAROC in the previous example as 23.35%. Given that the risk free rate is 7.5% and the firm's equity ...
... an interest of 3% pa. Operating cost is 0.5% of the total loan book. Expected loss of the portfolio is assumed to be 1%. Calculate the risk-adjusted return and RAROC ...
... The constant for adjusting the day-to-day event risk which is not captured by the VAR model is 1.24 and the multiplier for determining the charge for the unused portion of the VAR limit is 0. ...
... capital charge for market-risk = F1*VAR + F2*{max[VAR- VAR limit],0} + F3*{max[VAR -VAR limit],0} = 1.24*875,000 + 1.7*(875,000- 620,000) + 0 = $1,518,500. The RAROC for the business = risk-adjusted return ...
