The concept was developed by Bankers Trust and principal designer Dan Borge in the late 1970s.
RAROC is defined as the ratio of risk adjusted return to economic capital.
The economic capital is the amount of money which is needed to secure the survival in a worst-case scenario, it is a buffer against unexpected shocks in market values.
It did not take long for the industry to recognize the relevance and importance of both regulatory and economic measures, and eschewed focusing exclusively on one or the other.
In 2012, researchers at Moody's Analytics designed a formal extension to the RAROC model that accounts for regulatory capital requirements as well as economic risks.