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.
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