Return on risk-weighted assets (RoRWA) as the basis for new approach in management of the banks - the case of the Western Balkans

Abstract

Stricter regulation of banks, which emerged from the recent financial crisis draw attention to new challenges in the operation of banking institutions. To cope with these challenges, banks are searching new approaches, metrics and indicators which will enhance the quality of their risk management. One of those approaches is based on Return on Risk- Weighted Assets (RoRWA). This approach is theoretically and empirically elaborated in this paper. His application enables banks to take appropriate measures to enhance their performance and subsequently the performance of the economy as a whole. Besides the theoretical elaboration of the importance of RoRWA from micro and macroeconomic aspect, as well as a new approach for better management with risks, liquidity and capital in terms of stricter regulatory requirements, the paper is with special emphasis on quantitative analysis and research of the values and the trend of this indicator in the countries of the Western Balkans. The quantitative analysis is focused on three aspects: (1) Exploring the link between RoRWA and the economic activity in order to determine the performance and the efficiency of the banks in their operations. (2) Exploring the trend of RoRWA on a banking sector level in order to determine the resilience on the financial crises of the banking systems in different countries (3) Exploring the trend of RoRWA on the biggest banks in the analyzed countries in order to determine how much the quality of risk management by bank affects their overall performance. The comparative analysis in this paper is focused on the relationship achieved between risk and profit by the banks in the countries from the Western Balkans and in the developed European countries. The analysis covers the period during and after the financial crisis in order to identify the effects from the crisis on the performance of the banks and the factors that contributed some banks and banking sectors to be more resilient on the adverse effects from the crisis. The data used in the analysis is extracted from the financial statements of the banks in Macedonia, Croatia, Slovenia, Bulgaria, Serbia as well as data and indicators for the banking sectors as a whole in these countries. Subject to analysis in this paper are the strategic perspectives of the banks included in the analysis as well in order to identify threats and potential of the banking sectors in these countries.