Risk Adjusted Return On Capital (RAROC) is a loan-pricing criterion that has become increasingly prevalent in the banking industry since the 1990s. Under RAROC, a bank sets the loan term such that a certain rate of return is achieved on the regulatory capital required by the Basel capital...

Banks worldwide are required to hold a certain amount of regulatory capital to cushion against loans' unexpected losses. Currently, there are two widely adopted approaches in calculating regulatory capital: the standardized approach (the amount of regulatory capital equals to a certain...