klemenv

Talking About RAROC: Is "Financial Innovation" Good for Bank Profitability?

Funny thing with Regulatory and Economic capital is that one cannot cheat economic capital. If bank management 'adjust' estimates to create fake capital requirements, bank losses will haunt them down.

True power of RAROC calculations is that enables management to make decission, if particular transaction (or class of transactions) if profitable for them.

And remember, regulatory capitals creates opportunistic loss (lower ROE, or interest non-earning deposits at central bank, etc.) while economic capital creates real loss (write-offs, losses).

But any system is as good as it is enforced. If regulators are scared to enforced it with Lying Brothers & Co. than ...