73. Question
A regional commercial bank is considering a 1-year loan to be fully funded by deposits, with the following parameters:
- Loan amount: JPY 4.2 billion
- Average annual interest rate paid on deposits: 0.4%
- Annual interest rate received on loan: 3.2%
- Expected loss: 2.0% of face value of loan
- Annual operating costs: 0.5% of face value of loan
- Economic capital required to support the loan: 10.0%
- Average pre-tax return on economic capital: 1.4%
- Effective tax rate: 38%
- Other transfer costs: JPY 0
What is the after-tax RAROC for this loan? | Financial Risk Manager Part 2 Quiz - LeetQuiz
Financial Risk Manager Part 2
Explanation:
The formula for After-tax Risk-Adjusted Return on Capital (RAROC) is:
RAROC = (After-tax Net Income) / Economic Capital
Calculate Pre-tax Net Income: Since the loan is fully funded by deposits, the interest expense applies to the entire loan amount.
Pre-tax Net Income = Interest Income - Interest Expense - Expected Loss - Operating Costs + Return on Economic Capital
Interest Income = 3.2% * 4.2B = 134.4M
Interest Expense = 0.4% * 4.2B = 16.8M
Expected Loss = 2.0% * 4.2B = 84.0M
Operating Costs = 0.5% * 4.2B = 21.0M
Return on EC = 1.4% * 420M = 5.88M
Pre-tax Net Income = 134.4 - 16.8 - 84.0 - 21.0 + 5.88 = JPY 18.48 million.
Calculate After-tax Net Income: JPY 18.48 million * (1 - 0.38) = JPY 11.4576 million.
Calculate After-tax RAROC: JPY 11.4576 million / JPY 420 million = 0.02728, or 2.73%.
Get started today
Ultimate access to all questions.
Question
A regional commercial bank is considering a 1-year loan to be fully funded by deposits, with the following parameters:
Loan amount: JPY 4.2 billion
Average annual interest rate paid on deposits: 0.4%
Annual interest rate received on loan: 3.2%
Expected loss: 2.0% of face value of loan
Annual operating costs: 0.5% of face value of loan
Economic capital required to support the loan: 10.0%
