72873463 CAIIB Super Notes Bank Financial Management Module D Balance Sheet Management RAROC and...

7/28/2019 72873463 CAIIB Super Notes Bank Financial Management Module D Balance Sheet Management RAROC and Profit Planning

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CAIIB Super-Notes M S Ahluwalia Sirf Business

RAROC and Profit Planning

Module D: Balance Sheet Management
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CAIIB

SUPER NOTES

Bank Financial Management: RAROC and Profit Planning
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Contents

Coverage:

1. Profit Planning

2. Risk Aggregation and

Capital Allocation

3. Economic Capital and

RAROC


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PROFIT PLANNING

1.


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Profit Planning

Essentially involves Balance Sheet Management covering credit,

investment and non-fund based income

Income arises from three sources (Need to be maximized):

Interest Income

Fee Based Income

Treasury Income

Expenses(Need to be minimized):

Interest Expenses

Operating Expenses (Staff Costs and other costs)


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RISK AGGREGATION AND CAPITALALLOCATION

2.


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Risk Aggregation and Capital Allocation

Most commonly used approach to estimate aggregate risk exposure is

RAROC (Risk Adjusted Return On Capital)

Key is matching of revenues, costs and risks on transaction or portfolio basis over a

defined period

Expected losses are covered by reserves and unexpected losses require capital

allocation

Second approach is EaR

Similar to RAROC but depends less on capital allocation and more on cash flows or

variability in earnings

Ignores the value changes in Assets and Liabilities due to changes in market

interest rates


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ECONOMIC CAPITAL AND RAROC

3.


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Economic Capital and RAROC

Risk Capital: Economic capital required to support the banks

financial risk

Pricing of products should be a buffer against expected losses


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Risk Capital

RAROC is part of family of risk adjusted performance

measures (RAPM)

Risk Capital (RC) = VAR

RAPM = Profit/RC


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RAROC Methodology

Risk Management: Includes measurement of portfolio

exposure, the volatility and correlations of risk factors

Capital Allocation: Requires choice of a confidence level andhorizon for the VAR measure

Performance Measurement: Adjustment of performance to

Risk Capial

Can be based on RAPM Method

EVA = Profit (Capital x k) (Higher the EVA, better the project/product)


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Do you have any questions or queries or some feedback to give?

Just mark an email to [email protected]
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CAIIB Super-Notes M S Ahluwalia Sirf BusinessFor more Super-Notes: Click Here

M S Ahluwalia, amongst other things, is a visual artist, blogger,

blog designer and of course an MBA and Banker from New

Delhi, India.

To know more about him you may visit his blog-site:Estudiante De La Vida
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72873463 CAIIB Super Notes Bank Financial Management Module D Balance Sheet Management RAROC and...

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