It stands for return on normative regulatory equity; a version of return on equity (ROE) in which normative regulatory equity (NRE) is used as a denominator. It represents the annualized net income (NI) as a percentage of the average normative regulatory equity (typically defined as the CET-1 capital that is required to bring a bank’s franchise (and its sub-segments) to a CET- 1 ratio (fully loaded) of 10.5%.)
As a profitability measure, RONRE indicates how efficiently an institution did invest and manage its normative regulatory equity, i.e., that type considered at or within standard level(s) as per specific norms (i.e., Basel III). Return on normative regulatory equity (RONRE) is calculated by relating net income (NI) to normative regulatory equity:
RONRE = net income/ average normative regulatory equity
Return on normative regulatory equity determines the return on an entity’s average normative regulatory equity allocated to its business and operations.
Normative regulatory equity can be measured using bases such as book value (BV) or fair value (economic capital).
