A B C D E FL G H J K 1 2 3 4 5 6 7 8 Risk-Adjusted Return on Capital (RAROC) is a meausre that banks used to assess the profitability of relationships with their corporate clients. I have entered the basic information about a relationship below and you just need to use that information to calculate RAROC. You will probalby want to refer back to the formula given in the article that you read in the lessons section of this module. Most of the components are calculated for you and you will need to calcuate RAROC. Having the information laid out this way should give you a better understanding of the calculations. Suppose Regions Bank is evaluating the profitabilty of it's relationship with Puffs, Inc. Regions provides a credit line of $100,000,000 for Puffs and must hold economic capital equal to 4.0% of the total credit line. The interest rate on the credit line is 5.5% and Puffs is expected have average borrowings of $20,000,000 throughout the year. Given the probability of Puffs defaulting on the loan and the expected loss if the firm does default, Regions has estimated the expected loss to be $225,000. 9 Information $ 10 In addition to interest on the loan, Puffs average fees are $600,000 per year. Regions cost-to-income ratio is 12.0%. 11 The line of credit will be be funded with $100,000,000 in deposits and Regions pays an interest rate of 0.2% on deposits. 12 13 Calculate the Risk-Adjusted Return on Capital (RAROC) for this relationship.| 14 15 16 17 Credit Line 18 Interest Rate Calculations 100,000,000 Revenue $ 1,700,000 5.50% Operating Costs $ 204,000 19 Average Borrowing 20 Fees 21 Expected Loss $ 20,000,000 Liquidity Costs $ 200,000 $ 600,000 Expected Loss $ 225,000 $ 225,000 Economic Capital $ 4,000,000 22 Required Economic Capital 4.00% 23 Cost-to-Income Ratio 12.00% RAROC 27 28 29 222222 24 Deposits (liquidity to support the credit line) $ 100,000,000 25 Interest Rate on Deposits 0.20% 26