Risk-adjusted return on capital is an index to measure the risk of obtaining return, and it is also an effective tool to measure the financial performance after risk adjustment. It provides a unified standard for measuring income between different enterprises/departments.

The risk-adjusted return on assets of commercial banks can be obtained by the following methods:

RAROC= total profit after risk adjustment ÷ average asset balance

Total profit after risk adjustment = current year's profit of the Bank+actual increase of accrued reserves this year+decrease of accrued reserves.

Extended data:

RAROC was originally developed by a research group of former American Bankers Trust Fund in the late 1970s. The original intention of this research team is to use it to measure the risk of a bank's investment portfolio and the total amount of equity capital that can effectively avoid risks for depositors and creditors of the bank.

Since then, many banks have started to use RAROC (or develop similar risk assessment systems). They all want to quantify the total amount of equity capital needed to support their business activities (such as traditional lending activities, fee trading activities, etc.).

Baidu Encyclopedia-Risk-adjusted Return on Capital