Dear David: On your webinar 「2010-7-a-Operational」 page 8: Define, compare and contrast economic and regulatory capital. What is the meaning of Common risk currency? And another question, On your webinar 「2010-7-a-Operational」 page 9: The calculation of RAROC: Loan is funded with deposits that earn (a deposit charge of) 5%. Here the loan is $1 billion. We got COF(Cost of Fund)=1,000MM*5%=50MM However, on the book 「Risk Management」, Chapter 14 –Capital Allocation and Performance Measurement, Page 533: Crouhy use $925 million ($925 million = Loan – Economic Capital = $1 billion-$75 million), not simply the loan $1 billion to calculate COF. Should I minus the Economic Capital to calculate COF? Many Thanks
Hi ckyeh, In regard to common risk currency, can I recommend my brief note @ http://www.bionicturtle.com/how-to/webinar/economic_capital_webinar_notes/ … which links to a presentation that I like a lot: http://www.scribd.com/doc/18553899/Economic-Capital-a-Common-Currency-for-Risk In regard to the RAROC, you are looking at an earlier print of his book. We first discovered Crouhy's error of $925 (and forward to him) three years ago (http://www.bionicturtle.com/forum/viewthread/44/) … such that later prints do fund the liabilities with $1 billion (http://www.bionicturtle.com/forum/viewthread/664/) So, the revised view (as per my XLS) is to fund with liabilities equal to the loan. In this case, correct is to use $1 billion. (My learning XLS 7.a.1 @ http://www.bionicturtle.com/how-to/spreadsheet/7.a.1_raroc_crouhy/ Actually labels a "Crouhy v1" which is your print and the revised "Crouhy v2" because there can still be a debate about it. But safe is $1 BB.) David
Hello David Makes sense what you write, since the loan has to be fully funded and the EC is set aside (otherwise it also couldn´t earn a return, since the actual cash is with the borrower...). In your study notes (Operational and Integrated Risk Management) on page 5 however, you also deduct the EC from the loan in the first example, ie COF= (1bn - 50 Mio) *5% = 47.5 Mio. To be consistent this number should be 1bn * 5% = 50 Mio Regards Christian
Hi Christian, Yes, i totally agree. Frankly, that was a legacy example (i.e., based on the first print of Crouhy) that I just failed to correct. Thank you! David
