Actual formula for calculating RAROC(AR)?
Posted: January 18th, 2017, 9:46 am
Hi,
I'm trying to put together an Excel-model for simulation of loan profitability for the bank I work in. A model already exists, but not in Excel, and it's slow.
I have been browsing our bank's intranet and the internet for a comprehensive formula for calculation of risk adjusted return on capital (at risk). I can't find anything of substance that would allow me to simulate this rigorously in Excel.
For clarity: I know the overarching formula is Risk Adjusted Profit / Economic Capital. Then it becomes slightly more unclear. Economic Capital is a product of Risk Weighted Assets x CET1 target. My understanding is that RWA is the sum of credit risk, market risk and operational risk.
Credit risk makes up the majority % of RWA, and is a product of Exposure at Default and some risk weight (which is a function of Loss Given Default, Probability of Default and maturity). This is where I grind to a halt. Is this risk weight bank specific or does it exist a general formula?
Any help appreciated!
I'm trying to put together an Excel-model for simulation of loan profitability for the bank I work in. A model already exists, but not in Excel, and it's slow.
I have been browsing our bank's intranet and the internet for a comprehensive formula for calculation of risk adjusted return on capital (at risk). I can't find anything of substance that would allow me to simulate this rigorously in Excel.
For clarity: I know the overarching formula is Risk Adjusted Profit / Economic Capital. Then it becomes slightly more unclear. Economic Capital is a product of Risk Weighted Assets x CET1 target. My understanding is that RWA is the sum of credit risk, market risk and operational risk.
Credit risk makes up the majority % of RWA, and is a product of Exposure at Default and some risk weight (which is a function of Loss Given Default, Probability of Default and maturity). This is where I grind to a halt. Is this risk weight bank specific or does it exist a general formula?
Any help appreciated!