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OIRM-1-capital-allocation-and-performance-measurement.html
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<!doctype html>
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<head>
<meta charset="utf-8">
<title>Operational and Integrated Risk Management | Chapter 1 | Capital Allocation and Performance Measurement</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Chapter 1</h1>
<h3>Capital Allocation and Performance Measurement</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Risk-Adjusted Return on Capital (RAROC)</h2>
<ul>
<li>Provides an economic basis to measure all relevant risk types and positions consistently</li>
<li>Generates appropriate risk/reward signals at all business levels</li>
<li>Affects how the bank allocates capital, performs risk analyses, adjusts pricing strategies, and many other processes</li>
</ul>
</section>
<section>
<h2>Capital</h2>
<ul>
<li>Economic capital</li>
<ul>
<li>Cushion against various risks inherent in business</li>
<li>Absorbs unexpected losses, up to a certain confidence level</li>
</ul>
<li>Regulatory capital</li>
<ul>
<li>Derived from a set of rules to ensure that there is enough capital in the banking system</li>
</ul>
</ul>
</section>
<section>
<h2>Risk Management Information System (MIS)</h2>
<p><em>Definition: A system with sophisticated, detailed data collection, a powerful computation engine, massive storage capacity, and information distribution capability</em></p>
</section>
<section>
<h2>RAROC 10 Commandments</h2>
<ol>
<li>Include all business activities and global operations</li>
<li>Implement a RAROC system impervious to arbitrage</li>
<li>Be explicit, consistent, and congruent with other policies</li>
<li>Recognize different types of capital, but emphasize economic capital</li>
<li>Use a single risk-adjusted hurdle rate as the cost of capital</li>
<li>Develop and implement an economic risk framework capturing credit, market, and operational risk</li>
<li>Recognize funding and time-to-close liquidity</li>
<li>Atribute capital as a function of risk</li>
<li>Economic capital should be based on an appropriate confidence level</li>
<li>Match revenues and risk charges</li>
</ol>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
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