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T203 · Cat-17 · Counterparty Credit Risk · Loan Pricing

RAROC Loan Pricing Model

Model risk-adjusted return on capital for loan and facility pricing. Inputs: loan amount, margin, fees, cost of funds, expected loss (from T198), capital allocation (from T201), and operating cost. Outputs RAROC vs. hurdle rate verdict, economic profit/loss, P&L waterfall, minimum margin calculation, and margin sensitivity table.

RAROC Economic Profit Risk-Adjusted Return Zero PII · Client-side

Last Reviewed · 2026-05-12

Configuration

Facility Structure

Loan / Facility Amount ($)

Maturity (years)

All-In Margin (bps)

Spread over reference rate (SOFR/EURIBOR etc.).

Cost of Funds (bps)

Bank's internal funding cost over reference rate.

Upfront Fee (% of facility)

Annual Agency / Commitment Fee (%)

Credit & Capital Inputs — from T198 / T201

Expected Loss (EL) (annual $)

From T198: annual PD × LGD × EAD.

RWA ($) — from T201

CET1 Capital Ratio (% held)

CET1 ratio the bank allocates against this RWA. Minimum regulatory 4.5%.

Operating Cost (% of loan p.a.)

Allocated origination, servicing, and overhead costs per annum.

Hurdle Rate

Target RAROC (% hurdle)

Minimum RAROC to approve the facility. Typically 10–15% for corporate lending.

Cost of Equity (% CAPM)

Used to compute economic profit (EVA). Typically CAPM-derived.

About This Tool

RAROC Formula Chain

NII = (Margin − CoF) × Loan
Fees = Upfront/M + Annual Fee
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Rev = NII + Fees
− EL = PD × LGD × EAD
− OpEx= % × Loan
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RANI = Rev − EL − OpEx
EC = RWA × CET1%
RAROC = RANI / EC × 100
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EP = RANI − CoE × EC

Economic Profit (EP)

EP = RANI − (Cost of Equity × Economic Capital). Positive EP = the deal creates value above the cost of capital. Negative EP = the deal destroys shareholder value even if RAROC is positive.

Minimum Margin

The minimum all-in margin (bps) at which RAROC equals the hurdle rate. This is the floor below which the deal should not be approved without additional fee income, collateral, or volume compensation.

Workflow Integration

Feed outputs from T198 (Expected Loss), T201 (RWA), and T197 (rating/sector) into this tool for an end-to-end credit decision model. Run T202 first to stress-test RAROC under adverse scenarios.

RAROC Pricing Results

Annual P&L Waterfall

Minimum Margin to Meet Hurdle Rate

bps all-in margin

Margin Sensitivity — RAROC at ±150bps

All-In Margin (bps)	Net Spread (bps)	NII (annual)	RANI	RAROC	vs. Hurdle	Economic Profit

Pricing Commentary