In this article, a risk-adjusted return on capital (RAROC) valuation scheme for loans is derived. The critical assumption throughout the article is that no market information on a borrower's credit quality like bond or CDS (Credit Default Swap) spreads is available. Therefore, market-based...

In the last two decades, both internal and external risk management of banks have undergone significant developments. Banking supervision encourages banks to use a risk-based approach for computing minimum regulatory capital. Accounting rules have been tightened requiring more timely loss...