Raroc as a credit risk approach
Languages of publication
Credit risk is one of the most common risks in the world, known for many centuries, but the RAROC model is quite innovative. RAROC (Risk Adjusted Return On Capital) is an answer for shareholders’ need for improved performance, especially the maximization of shareholder value. The main point of this article is to show the advantages as well as the limitations of the RAROC approach on the market, with the warning that financial intermediaries cannot rely only on models and could not be sure that even the most sophisticated methods provide them with complete certainty.
- Altman E., Saunders A., Credit risk measurement: Developments over the last 20 years, “Journal of Banking and Finance”, December 1997.
- Artzner Ph., Delbaen F., Eber J.-M., d Heath D., Coherent measures of risk, “Mathematical Finance” 1999, vol. 9.
- Bagchi S.K., Credit risk management – a panacea or conundrum?, “SBI Monthly Review” 2003, vol. 42, no. 10.
- Bluhm Ch., Overbeck L., Wagner Ch., An Introduction to Credit Risk Modeling, Chapman & Hall/CRC, Boca Raton 2003.
- Bodla B.S., Richa V., Credit risk management framework at banks in India, “The Icfai University Journal of Bank Management” 2009, vol. VIII, no. 1.
- Chłopek Piotr, Credit Risk of the Corporate Project, Master Thesis, Wroclaw University of Economics, Wroclaw 2009.
- Chong Y.Y., Investment Risk Management, John Wiley & Sons Ltd., Chichester 2004.
- Crouhy M., Galai D. Mark R., Risk Management, McGraw-Hill, New York 2001.
- Dermine J., Pitfalls in the application of RAROC in loan management, “The Arbitrageur”, Spring 1998.
- Froot K., Stein J., Risk management, capital budgeting, and capital structure policy for financial institutions: and integrated approach, “Journal of Financial Economics” 1998, no. 47.
- Jajuga K. et. al., Zarządzanie ryzykiem, Wydawnictwo Naukowe PWN, Warszawa 2007.
- Jameson R., Between RAROC and a hard place, “ERisk”, February, New York 2001.
- James Ch., RAROC Based Capital Budgeting and Performance Evaluation: A Case Study of Bank Capital Allocation, Wharton Financial Institutions Centre, October, Philadelphia 1996.
- Korablev I., Qu S., Validating the public EDF model performance during the credit crisis. Modeling methodology, “Moody’s KMV Company”, 26th June 2009.
- Louberge H., Schlesinger H., Coping with credit risk, “Journal of Risk Finance”, Emerald Group Publishing, vol. 6, no. 2, March 2005.
- Mark R., Bishop W., The flexibility of RAROC. The many values of risk adjusted return on capital approach, Teradata Magazine, NCR Corporation, March 2007.
- McKinsey, Special report on the new world of financial services, “The McKinsey Quarterly” 1993, no. 2.
- Merton R., Perold A., Theory of risk capital in financial firms, “Journal of Applied Corporate Finance” 1993, no. 6.
- Milne A., Onorato M., Risk-Adjusted Measures of Value Creation in Financial Institutions, European Financial Management, Blackwell Publishing Ltd., 2010.
- Pattanaik S., The Global Financial Stability Architecture Fails Again: sub-Prime Crisis Lessons for Policymakers, Crawford School of Economics and Government, The Australian National University and Blackwell Publishing Asia, Canberra 2009.
- Prokopczuk M., Rachev S., Trück S., Quantifying Risk in the Electricity Business: A RAROC-based Approach, PSTAT, University of California, October, Santa Barbara 2004.
- Saunders A., Credit Risk Measurement: New Approaches to Value at Risk and Other Paradigms, John Wiley & Sons Inc., New York 2007.
- Saunders A., Cornett M.M., Financial Institutions Management: A Risk Management Approach, 6th edition, McGraw-Hill, New York 2008.
- Turnbull S., Bank and Business Performance Measurement, Economic Notes by Banca Monte dei Paschi di Siena SpA, vol. 31, no. 2, Blackwell Publishers, Malden 2002.
- Turnbull S., Capital allocation and risk performance measurement in a financial institution, “Financial Markets, Institutions & Investments”, vol. 9, no. 5, Blackwell Publishers, Malden 2000.
- Warwick B., The Handbook of Risk, John Wiley & Sons Inc., New Jersey 2003.
- Zaik E., Walter J., Kelling G., James Ch., Raroc at the Bank of America: From theory to practice, “Journal of Applied Corporate Finance” 1996, no. 9(2).
Publication order reference