Risk-Adjusted Return on Capital. See how each input drives loan profitability.
1. Inputs
Input Risk
$
%
%
%
yrs
Interest & Fees (Loan)
%
%
Additional Revenues
$
$
Expenses (Loan)
%
$
Additional Expenses
$
$
2. Capital Variables
Variables
3. Interim Calculations
Revenue Components
Loan Revenues$1,000.00
Fee Revenues$0.00
Capital Benefit$48.32
Other Revenues$0.00
Cost Components
Funding Cost$500.00
Expected Loss$100.00
Operating Expense$300.00
Other Expenses$0.00
4. Capital Requirement
Asset Correlation (r)0.2325
Coefficient (b)0.0799
Maturity Adjustment1.2725
Expected Loss
$100.00
+
Unexpected Loss
$966.49
=
Total Capital
$1,066.49
5. Totals
Total Revenues
$1,048.32
−
Total Expenses
$900.00
=
RAROC Numerator
$148.32
RAROC =
$1,048.32−$900.00
$966.49
RAROC
15.35%
Net return on capital at risk
NOTE
Unexpected Loss is calculated using the Basel IRB Vasicek single-factor formula with regulatory asset correlation, coefficient b, and maturity adjustment. The formulas are derived from the Basel IRB concepts for SME loans. The calculation is based on a one-year scenario. Use this model for training purposes only.