From strategy to tactics

Effective tactical use of risk management information has long been an aspiration of many organisations, but technical obstacles have stood in the way. In this third of four articles on integrated credit risk management, David Rowe argues that the reality may finally be within reach

The risk implications of business decisions came to the forefront in the 1980s. Then, Bankers Trust pioneered the use of risk-adjusted return on capital (Raroc) instead of simple return maximisation as a strategic decision tool. This was driven by the recognition that market perceptions of a company’s risk played a significant role in determining equity valuations. By the early 1990s, Raroc, or some variation thereof, had become widely accepted among financial institutions as the basis for