RAROC approach for risk evaluation

Banks, across the world, use different techniques to evaluate the probable risks through sensitivity analysis, scenario analysis, break-even analysis etc. The most commonly used approach is the Risk Adjusted Return on Capital (RAROC). The banking as well as Non-banking financial institution and also large numbers of businesses are utilizing RAROC metric to calculate Return on…

What is economic capital?

There are three types of capital viz. Regulatory capital, Book capital and Economic capital. Regulatory capital is the amount of capital a bank is required to hold as per the stipulations prescribed by the banking regulator of the country. Book Capital is the actual capital that the bank has, which includes equity capital, loans and…

What is contingency planning?

The contingency planning is a regular part of risk management for exceptional risk though unlikely, may have disastrous consequences when an unexpected event or situation occurs. In the other words, contingency planning is a process that includes risk assessment and a mitigation strategy for those risks.  It generally refers to a negative situation like direct…

What is financial Stress testing?

Stress test is a process or simulation technique that evaluates an institutions reaction to different crisis situations. Stress testing and capital planning are increasingly linked to many risk management processes that require coordination across risk, treasury, and financial planning and analysis functions.  Banks have been using stress tests to evaluate their potential vulnerability to certain…