Credit risk and RAROC

Profitability valuation of a credit loan portfolio per region, product type and branch. Uses credit VaR and RAROC

This banking example shows how to measure profitability for a commercial bank portfolio of credit assets. In the credit business, losses of interest and principal occur all the time – there are always some borrowers that default on their obligations. The losses that are actually experienced in a particular year vary from year to year, depending on the number and severity of default events.

What you’ll learn

  • Profitability valuation of a credit loan portfolio per region, product type and branch. Uses credit Value at Risk and RAROC (Risk Adjusted Return on Capital)..

Course Content

  • Introduction to Loss Given Default models –> 4 lectures • 19min.
  • Simulation and results interpretation –> 3 lectures • 21min.

Credit risk and RAROC

Requirements

  • Basic knowledge of @RISK and Excel.

This banking example shows how to measure profitability for a commercial bank portfolio of credit assets. In the credit business, losses of interest and principal occur all the time – there are always some borrowers that default on their obligations. The losses that are actually experienced in a particular year vary from year to year, depending on the number and severity of default events.

Using a Basel II-based approach we propose a Loss-Given-Default type of model inserting Monte Carlo simulation in order to incorporate probabilities that allow calculation of unexpected losses.

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