A bank wish to retain the A rating, which implies it needs to keep the probability of
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Question:
A bank wish to retain the A rating, which implies it needs to keep the probability of default over 1 year below 0.1%. The VaR 99.9% probability worst case has been calculated to be 7% of the outstanding loans, and its average losses are estimated to be 1.5% of outstanding loans per year. The bank's spread between cost of fund and interest charged is 3%, and the annual administrative cost are 1% of outstanding loans. Ignoring the impact of any return from economic capital, what is the bank's Risk-Adjusted Return on Capital on these loans?
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