Definitions for "RAROC"
Risk Adjusted Return On Capital is a key figure for measuring the risk/return ratio of banking operations. The risk-adjusted result, i.e. net earnings minus standard risk/costs is related to necessary or allocated risk capital. Risk capital requirements arise separately from the credit, market and operative risks associated with the respective business operation.
RISK ADJUSTED RETURN ON CAPITAL. A technique of risk analysis that assumes a higher return for a riskier project than a less risky one.
Risk Adjusted Return on Capital. A measurement tool that enables management to allocate capital, and the related cost of capital, in respect of credit, market and operational risk by type of transaction, client and line of business. This facilitates the deployment of capital to business units that can provide the maximum shareholder value on the capital invested.