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.
Highlights
Several economic crises took place in recent times, largely caused by the poor management of banking leverage
The values in table 1 represent the model chosen as benchmark in this study, and were used as the methodology in the calculation of the Minimum Capital Requirement, as the minimum capital base a bank must have in order to face risks
In the test conducted for the Bank of Brazil, the difference in the methodologies for Calculation of the RAROC presented differences when comparing the methodology of the Minimum Capital requirement and the RAROC methodologies with the CreditMetricsTM, the Basic Model For Return and the Net Equity Equivalence Method; as for the case of Bradesco, only upon comparing the Benchmark model with the PR equivalence model we notice a little difference when we observe the p-value; such small differences when we observe that the p-value is (0.00826), being very close to 0.01, since it would be interpreted as if there was no difference between methodologies
Summary
Several economic crises took place in recent times, largely caused by the poor management of banking leverage. For financial institutions, the Invested Capital indicated in equation 14 can be considered equivalent to the Risk Adjusted Capital and assuming that in equation 14 the NOPAT is given by equation 17, the EVA value can be obtained through the expression: (18)
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