Business Unit/Product RAROC.

Challenge: Banks face the dual challenge of managing risk and evaluating performance across numerous business lines and products. Clearly, institutions need to substitute views of the businesses that merely reward growth with a system that accounts for risk. The concept of risk-adjusted return on capital has emerged as a powerful single measure that captures both risk and performance in a way that can be compared across the entire institution. However, for various reasons, many institutions still calculate RAROC on a portfolio-wide basis, rather than at the more granular levels that would allow them to allocate their resources to their most effective uses and maximize the use of capital.

Solution: ERisk can help banks calculate return and capital usage by business line and product line, working with the bank to navigate the difficult estimation process for allocating income, costs, and capital along multiple dimensions and into the appropriate buckets. ERisk has a robust and complete capital calculation framework deployed at dozens of financial institutions as well as tested models for calculating the return at product and business unit level. Our solution can be implemented using enterprise-class software, empowering decision-makers with on-demand reporting of RAROC by a customizable set of dimensions.

Benefits: Optimizing RAROC within the portfolio at the business line and product level maximizes a bank’s use of its balance sheet. By constantly monitoring the RAROC of their businesses and products, institutions can quickly make decisions to reallocate resources and capital that take advantage of changing market conditions, whether those conditions are good or bad.

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