Risk-adjusted return on capital: A review of the banks of Turkey and Russia

The banking sector is an important sub-sector of the financial sector. It plays an important role in financing economic growth. It concerns savers, households, entrepreneurs, investors, producers, private and public sectors. Banks ensure the functioning of the economy by supporting its activities. Today, banks have to face many different challenges and are exposed to fierce competition. All this directly affects banks and forces them to concentrate all their resources and use them with maximum efficiency. Under these conditions, liquidity problems, capital adequacy and other risks arise every day. Banks are also exposed to a wide range of external factors that affect their activities. Risk management is part of a bank's financial policy. The financial policy of a bank is its general policy for the formation and transformation of its financial resources. On the basis of the financial policy, the financial resources of the commercial bank are managed and risks are managed. Today, different models and ratios are used to manage risks. One of the most important ratios for managing risk is the RAROC (Risk-Adjusted Return on Capital) ratio. RAROC systems allocate capital for two main reasons: risk management and performance evaluation. For risk management purposes, the primary objective of capital allocation to each business unit is to determine the optimal capital structure of the bank. This process involves an assessment of how much each business unit's risk (volatility) contributes to the bank's overall risk and hence to the bank's overall capital requirements. In this thesis, credit and market risks of banks are analysed and an application is made on banks operating in Turkey and Russia. The use of mathematical and statistical methods such as RAROC is important for banks in terms of financial risk management. These methods allow banks to estimate the risks in their portfolios and obtain risk-adjusted returns. However, it is recommended to use these methods under the supervision of an expert financial analyst in order to use them correctly. According to the data obtained within the scope of this research, it has been determined that the RAROC 1 and RAROC 2 ratios of both Turkish and Russian banks are not constant and consistent. There may be many reasons for this, such as continuous changes in the level of risk, changes in the methods of calculating risks, changes in legislation, decrease or increase in profit and equity, decrease or increase in reserves. Keywords: Risk, RAROC, Risk Adjusted Return on Capital, Risks in Banking, Basel Accords, VİKOR.