Question

A credit committee evaluates a proposed corporate loan deal. If the calculated RAROC is less than the bank's Hurdle Rate (RAROC < Hurdle Rate), what does this indicate, and what action should the bank take?

Q: Answer-A credit committee evaluates a proposed corporate loan deal. If the calculated RAROC is less than th...

The Hurdle Rate represents the banks required return on capital cost of equity. o If RAROC Hurdle Rate, the deal creates shareholder value and should be approved. o If RAROC lt Hurdle Rate, the revenue generated is insufficient to compensate for the economic capital at risk. The credit officer must either raise the loan pricing interestfees or decline the facility.