Performance of the different RAROC models and their relation with the creation of economic value: A study of the largest banks operating in Brazil

Guasti Lima Fabiano (), Castro Junior Sant Clair de (), Pimenta Júnior Tabajara () and Luiz Gaio
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Guasti Lima Fabiano: University of São Paulo
Castro Junior Sant Clair de: University of São Paulo
Pimenta Júnior Tabajara: University of São Paulo

Contaduría y Administración, 2014, vol. 59, issue 4, 87-104

Abstract: This article approaches several different methodologies for calculation of the RAROC (Risk Adjusted Return on Capital) for Brazilian banks. Two questions gave reason to the study:whether the application of different methods for calculation of the RAROC would generate significantly different results?, and checking what is the connection between the RAROC and the generation of economic value, measured by the EVA (Economic Value Added), for the largest banks with operations in Brazil? The following methodologies for verification of the RAROC were applied: Buch’s Method (2011); Prokopczuk’s Method (2006); Prokopczuk’s Method (2006) with application of the VaR technique; Saunders’s Method (2007); Chapelle’s Method (2008); and the Smithon & Hayt Method (2001), by applying these parametric and non-parametric statistics in order to check the sensibility of the differences between models. This study has evidenced that, when we compare the methodology based on minimum capital with other methodologies, there are no significant differences, except in the few cases indicated. It is important to notice it only occurred in the case of the Bank of Brazil and it was concentrated in the comparison of the Creditmetrics models and in the methodology in which there is equivalence by the reference equity.

Keywords: EVA (Economic Value Added); RAROC (Risk Adjusted Return on Capital); risk capital; banking; Basel accords (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (1)

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