Performance measurement is the most important piece in the puzzle of integrating risk with business profitability. Risk-based pricing frameworks such as Risk-Adjusted Return on Capital (RAROC) framework allow institutions to evaluate the risk-adjusted profitability at various levels of granularity such as transaction level, customer relationship level or at business lines level.
Computation of Expected RAROC allows business and risk teams to estimate the expected profitability of a transaction and customer relationship. RAROC framework is also used to arrive at the break-even pricing for each transaction to meet a pre-defined hurdle rate of return on capital on risk-adjusted basis. Comparison of Expected RAROC with Realized RAROC periodically allows insights into actual profitability of an account.
Asymmetrix RAROC Software empowers banks with an integrated solution to calculate Expected RAROC and Realized RAROC at different levels of granularity. RAROC module allows business managers to have a better understanding on the pricing components of every transaction including credit risk spread (based on borrower's credit quality and security package), facility utilization levels, direct and indirect operating costs, cost of funding etc. As Predicted and Realized RAROC are calculated at transaction level, the integrated dashboard allows aggregation at any level of granularity to identify profitable business units, geographies, industries etc. and use the same as an input for capital allocation.
Calculate Expected RAROC at transaction and customer level after considering funding cost, operating costs, credit risk spread (default and non-recovery risks), facility utilization rate, regulatory (Standardized or IRB approach) or economic capital requirement etc.
Integrated calculation engine and dashboard to compute and report realized risk-adjusted return at various levels of granularity such as transaction, customer, industry, business unit etc.
Price individual transactions to achieve a pre-determined hurdle rate of return on capital. Analyse individual pricing components such as cost of funding, credit risk spread (based on default risk and recovery risk), operating costs, cost of capital etc.
An integrated dashboard provides standard reports required at facility, borrower, business unit and portfolio level.
Ensure "Internal Use" requirements are met for IRB Approach, as using internal PD, LGD and CCF estimates for risk-based pricing satisfies the Use Test laid down in the guidelines.
Calculate realized risk-adjusted return on regulatory and economic capital at business unit level for capital allocation.