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What is Understanding RAROC in Banking about?
The RAROC framework aims to evaluate all business streams of a financial institution equally by measuring expected and unexpected losses using VAR or worst-case models. Key to RAROC is matching revenues, costs, and risks over a defined period on a transaction or portfolio basis. RAROC measures risk as return variability and allocates capital accordingly, requiring risky positions to earn a return compensating the bank for incremental risk. RAROC and similar approaches like EaR analyze risk-adjusted performa
- Author
- kushalnadekar
- Language
- EN