Risk-adjusted return on capital is what turns rating and expected loss into a decision.
Net income from the deal, minus the loss it is expected to produce, minus the cost to run it, divided by the capital the institution must hold against it.
The number that goes into committee. The number that compares deals across segments and tenors on the same scale.
We learn more about the concept of calculating capital requirements in our credit risk analytics class in the Financial Skills Campus.
Five activities. One number that pricing, capital allocation, and the Risk Appetite Statement all anchor on.
Margin times exposure plus fees. Net of funding cost.
From Phase 2. The risk cost of the deal.
Allocated origination, monitoring, and servicing.
Risk-weighted exposure times institution CET1 target.
Pass or decline. Or reprice. Or ask for more collateral.
Set income, expected loss, operating cost, and capital. The calculator runs the RAROC line and shows the result against the hurdle rate. Move the rating a notch and watch PD shift EL, and EL shift RAROC. The discipline pricing committees rely on, visible in three minutes.
The full numerator and denominator side by side. Income minus EL minus operating cost in the numerator. Risk-weighted capital allocation in the denominator. RAROC compared to a configurable hurdle rate. Includes a rating sensitivity panel so a one-notch shift produces a visible decision change. Built for credit committees and pricing meetings that want the math at the table.
Launch the calculator →Phase 3 instruments turn the EL output of Phase 2 into a comparable return metric, then into a pricing or decline decision. The arithmetic is visible at the deal table, not buried in committee paperwork.
Margin, fees, ancillary income, net of funding cost. Source for the RAROC numerator. Standardised across product types so deals compare on the same basis.
View the toolMaps risk-weighted exposure to required capital using the institution's CET1 target. Handles Standardised and IRB approaches. Source for the RAROC denominator.
View the toolThe arithmetic engine. Combines income, EL, cost, and capital into a single return-on-capital figure. Sensitivity tabs show how the answer moves when rating shifts a notch or pricing changes ten basis points.
View the toolCompares RAROC against the institution's hurdle rate (typically a CET1-aligned target). Returns one of three signals: pass, reprice, or decline. Pre-built into deal-flow templates.
View the toolAggregated RAROC by segment, sector, and rating bucket. The cockpit Pricing Committee uses to decide where the institution is earning its capital and where it is not.
View the toolCapital is finite, and RAROC tells you where to spend it. Put one risk-adjusted number in front of the deal team and pricing stops rewarding volume and starts rewarding return on the capital the institution must hold.
Christian Ruehmer, Co-Founder, Q-Lana
Two places RAROC shows up next.
The full RAROC method, the link to capital allocation, and the connection to the Risk Appetite Statement that turns RAROC outcomes into governance feedback.
Where centricity becomes a profit and risk strategy.
Two deals can have identical margins and produce wildly different returns on capital. RAROC is the metric that surfaces the difference. It disciplines pricing, focuses capital on the segments that earn it, and gives the Risk Appetite Statement an empirical basis. Without it, growth and quality compete. With it, they align.
Thirty minutes. We compare your income build-up, capital allocation, hurdle logic, and portfolio view against what we have built and recalibrated across more than a hundred portfolios.
Curated news with practitioner commentary. One Deep Dive in rotation. One applied tool. Read in fifteen minutes. Used the same week.