Performance of the different RAROC models and their relation with the creation of economic value. A study of the largest banks operating in Brazil

Abstract

This article approaches several different methodologies forcalculation of the RAROC (Risk Adjusted Return on Capital)for Brazilian banks. Two questions gave reason to the study:whether the application of different methods for calculation ofthe RAROC would generate significantly different results?,and checking what is the connection between the RAROC andthe generation of economic value, measured by the EVA (EconomicValue Added), for the largest banks with operations inBrazil? The following methodologies for verification of theRAROC were applied: Buch’s Method (2011); Prokopczuk’sMethod (2006); Prokopczuk’s Method (2006) with applicationof the VaR technique; Saunders’s Method (2007); Chapelle’sMethod (2008); and the Smithon & Hayt Method (2001), byapplying these parametric and non-parametric statistics in orderto check the sensibility of the differences between models.This study has evidenced that, when we compare the methodologybased on minimum capital with other methodologies,there are no significant differences, except in the few cases indicated.It is important to notice it only occurred in the case ofthe Bank of Brazil and it was concentrated in the comparisonof the Creditmetrics models and in the methodology in whichthere is equivalence by the reference equity.