Profitability Indicator for Customers in Corporate Banking

The article is searching for an appropriate indicator of customer profitability in corporate banking. It points out the advantages and disadvantages of the most common indicator – RAROC. Basel III regulation increases capital requirements which push banks to reassess their approach to profitability measurement. This may make the indicator based on regulatory capital approach (resp. based on risk weighted assets) superior to standard RAROC. Nevertheless, the most relevant disadvantage of RAROC is that all the costs are allocated to the customer regardless of the cause-and-effect allocation principle. It leads to a bias of such indicator and possibly also to improper management decision about customers. This issue can be solved by a modification of RAROC which measures profitability on the level of margin instead of net profit.