Performance assessments of Taiwan’s financial holding companies

Abstract

This paper uses Risk-Adjusted Return on Capital (RAROC) to assess the performance of 14 financial holding companies (FHCs) in Taiwan. RAROC value indicates a firm’s performance after considering the market risk effect, and gives a better measurement of the firm’s operational productivity than traditional methods. We use the full valuation methods to calculate Value at Risk (VaR) as the market risk measurement for economic capital. According to the New Basel Capital Accord, the market risk of Internal Model should be adjusted, and the Bank for International Settlement suggests using the backtest to select the best full valuation method for estimating adjusted VaR. Therefore, this paper evaluates the best market risk model, and assesses and compares the performance for each firm before and after its merger and acquisition into the FHC. Overall, we find weak evidence that the performance of 14 FHCs increased over time.