| For efficient business strategy and to improve | | | | Operating Profit After Taxes. The money cost of |
| performance, many financial institutions, such as | | | | capital in EVA refers to the amount of money |
| banks, utilize banking performance metrics. These | | | | instead of the cost of capital in proportional rate. |
| metrics help in measuring the profitability of the | | | | Stern Stewart & Co. develops its registered |
| business units, to manage the risks that come | | | | trademark, Economic Value Added performance |
| with the allocation of capital, and to evaluate | | | | metrics. |
| performance of each business unit. | | | | Meanwhile, the RAROC or risk adjusted return of |
| The increasing prevalence of technology and the | | | | capital, is used to analyse the risk-adjusted |
| complexity of the market drive many institutions | | | | financial performance of an enterprise and to |
| to improve their performance. In a world filled | | | | provide a view of profitability. It is a risk-based |
| with competition, survival is an objective of many | | | | framework to measure profitability. |
| businesses, both the new ones and even | | | | A ratio of risk-adjusted return to economic |
| progressive ones, while those at the top also | | | | capital, RAROC is used to determine the |
| have the aspiration to sustain their glory. | | | | economic profit of an enterprise. This system is |
| Success in a competitive environment has then | | | | used to allocate capital for risk management and |
| become a challenge among businesses. To | | | | performance evaluation. |
| possibly attain this, businesses, such as banks, | | | | The risk-adjusted return of capital is utilized by |
| must measure their performance to be able to | | | | banks and other financial institutions. As a risk |
| come up with solutions once the result of the | | | | management tool, RAROC is used to determine |
| measure seems unfavourable. Banking | | | | the optimal capital structure of the bank through |
| performance metrics can be used to aid | | | | the allocation of capital to individual business units. |
| managers in coming up with complex decisions. | | | | Moreover, RAROC is used as a banking |
| Among the performance metrics used by many | | | | performance metric to let banks assign capital to |
| banks and other businesses in coming up with | | | | companies and business units, as determined on |
| financial information for decision-making and | | | | the economic value added or EVA of each unit. |
| evaluation are economic value added and | | | | The utilization of capital as determined on risk |
| risk-adjusted return of capital or RAROC. | | | | enhances the capital allocation of banks. The |
| Economic value added, simply known to its | | | | capital that is placed at risk is expected to provide |
| acronym version, is an estimate of real economic | | | | return beyond the risk-free. |
| profit of an entity after performing corrective | | | | EVA and RAROC are among the banking |
| adjustments to generally-accepted accounting | | | | performance metrics used by banking business |
| principles or GAAP accounting including the | | | | units to determine profitability in economic sense. |
| deduction of the equity capital's opportunity cost. | | | | The economic value added is utilized in corporate |
| Based on estimates, the utilization of GAAP in | | | | finance to determine the value being created |
| corporations ignores a certain worth in shareholder | | | | beyond the required return. On the other hand, |
| opportunity costs. | | | | the risk-adjusted return of capital is determined |
| The EVA of a business can be measured by | | | | for the allocation of capital for risk management |
| deducting the money cost of capital to the Net | | | | and performance evaluation purposes. |