RAROC (risk-adjusted return on capital)

Roles that need it

• Credit Risk Analyst
• Business Controller
• FP&A Analyst
• ALM Analyst
• Relationship Manager (Corporate & Business Banking)

Skills it belongs to

• Profitability analysis (margins, contribution)
• Basel framework and capital
• Credit analysis and creditworthiness

Related concepts

• Cost allocationCost allocation assigns shared costs, such as IT, operations or head office, to the products, business lines or entities that use them, using drivers like headcount, transaction volumes or usage. It feeds product profitability, pricing and internal charging.
• FTP (funds transfer pricing)Funds transfer pricing is the internal system that charges business units for the funding they use and credits them for the funding they raise, including interest rate and liquidity costs. It isolates rate risk in treasury and makes product margins comparable.
• Risk appetite (risk appetite framework)Risk appetite is the level and types of risk a firm is willing to take to meet its strategy, approved by the board. The risk appetite framework turns it into a statement, limits and indicators that are monitored and escalated when breached.
• Probability of default (PD)Probability of default is the likelihood that a borrower defaults over a given horizon, usually one year. Capital models use a long-run average (through-the-cycle) PD per rating grade, while IFRS 9 uses point-in-time 12-month and lifetime PDs that react to the economic outlook.

Sources

• Regulation (EU) No 575/2013 (Capital Requirements Regulation), EUR-Lex (external site) accessed 31 Oct 2026
• Basel Framework CRE36 IRB approach: minimum requirements, BIS (external site) accessed 31 Oct 2026

Updated 31 Oct 2026.