Return on Risk-Adjusted Capital

Return on Risk-Adjusted Capital

Return on Risk-Adjusted Capital (RORAC) is a step up from standard return on capital calculations as it adjusts for risk and enables banks to make more informed capital allocation decisions based on the ability of individual business lines to generate superior risk-based returns such that core businesses that use allocated capital more efficiently will have capital allocated to them ahead of business lines that don’t. RORAC is dividing net income by risk-weighted assets (RWA). RWA are already weighted by their level of risk so using as the denominator provides a ready-made risk ratio that can be used to compare like-for-like across different businesses.

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