2. Profit centre level
The ROE objective is relevant for the corporation as a whole. However, to make it operational, banks are setting corporate goals for profit centres, such as economic value added or economic profit.
Economic profit = (profit allocated) – (allocated equity × cost of equity) > 0
Three technical issues arise in the calculation:
Fund transfer price for deposits and loans: matched-maturity market rate. The bank must send the relevant signal to the managers collecting deposits or granting loans.
Equity allocation: regulatory capital vs. economic (risk-based) capital. As a manager, you will prefer to receive a low equity allocation, as your performance will look better. Banks are increasingly shifting away from the use of regulatory ...
Get Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition now with the O’Reilly learning platform.
O’Reilly members experience books, live events, courses curated by job role, and more from O’Reilly and nearly 200 top publishers.
