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Bank A is considering a loan to be fully funded by deposits, with the following...

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Finance

Bank A is considering a loan to be fully funded by deposits, with the following parameters:

Loan amount: $3 billion

Average annual interest rate paid on deposits: 1.5%

Annual interest rate on loan: 4.0%

Expected loss: 1.0% of face value of loan

Annual operating costs: 1.0% of face value of loan

Economic capital: 8.0% of the loan amount

Average return on economic capital: 3.0%

What is the risk-adjusted return on capital (RAROC) for this loan?

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