Value at Risk and Bank Capital Management (eBook)

Risk Adjusted Performances, Capital Management and Capital Allocation Decision Making

Francesco Saita (Autor)

eBook Download: PDF

2010 | 1. Auflage
280 Seiten
Elsevier Science (Verlag)
978-0-08-047106-8 (ISBN)

Infos

While the highly technical measurement techniques and methodologies of Value at Risk have attracted huge interest, much less attention has been focused on how Value at Risk and the risk-adjusted performance measures such as RAROC or economic profit/EVA? can be effectively used to improve a bank??s decision making processes. Academic books are typically concerned primarily with measurement techniques, and devote only a small section to describing the applications, usually without discussing the problems that changing organizational processes in banks may have on business units?? behaviour. Practitioners?? books are often based on a single experience, presenting the approach that has been pursued by a single bank, but often do not adequately evaluate that approach. In actual practice, the choice of how to use Value at Risk and risk-adjusted performance measures has no single optimal solution, but requires effective decision making that can identify the solution that is consistent with the bank??s style of management and coordination mechanisms, and often with characteristics of individual business units as well. In this book, Francesco Saita of Bocconi University argues that even though risk measurement techniques have greatly improved in recent years for market, credit and now also operational risk, capital management and capital allocation decisions are far from becoming purely technical and mechanical. On one hand, decisions about capital management must consider handling different capital constraints (e.g. regulatory vs. economic capital ) and face remarkable difficulties in providing a measure of ??aggregated?? Value at Risk (i.e. a measure that considers the overall value at risk of the bank after diversification across risk types). On the other hand, the aim of using capital more efficiently through capital allocation cannot be achieved only through a sort of centralized asset allocation process, but rather by designing a Value at Risk limit system and a risk-adjusted performance measurement system that are designed to provide the right incentives to individual business units. This connection between sophisticated and cutting edge risk measurement techniques and practical bank decision making about capital management and capital allocation make this book unique and provide readers with a depth of academic and theoretical expertise combined with practical and real-world understanding of bank structure, organizational constraints, and decisionmaking processes.

*Contains concise, expert analysis of the latest technical VaR measures but without the highly mathematical component of other books
*Discusses practical applications of these measures in the real world of banking, focusing on effective decision making for capital management and allocation
*Author is based at Bocconi University in Milan, Italy, one of the foremost institutions for banking in Europe

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Value at Risk and Bank Capital Management offers a unique combination of concise, expert academic analysis of the latest technical VaR measures and their applications, and the practical realities of bank decision making about capital management and capital allocation. The book contains concise, expert analysis of the latest technical VaR measures but without the highly mathematical component of other books. It discusses practical applications of these measures in the real world of banking, focusing on effective decision making for capital management and allocation. The author, Francesco Saita, is based at Bocconi University in Milan, Italy, one of the foremost institutions for banking in Europe. He provides readers with his extensive academic and theoretical expertise combined with his practical and real-world understanding of bank structure, organizational constraints, and decision-making processes. This book is recommended for graduate students in master's or Ph.D. programs in finance/banking and bankers and risk managers involved in capital allocation and portfolio management. - Contains concise, expert analysis of the latest technical VaR measures but without the highly mathematical component of other books- Discusses practical applications of these measures in the real world of banking, focusing on effective decision making for capital management and allocation- Author is based at Bocconi University in Milan, Italy, one of the foremost institutions for banking in Europe

Inhalt

Front cover 1
Title page 4
Copyright page 5
Table of contents 6
Preface 12
About the Book 12
Acknowledgments 13
Contributors 16
CHAPTER 1: Value at Risk, Capital Management, and Capital Allocation 18
1.1 An Introduction to Value at Risk 19
1.2 Capital Management and Capital Allocation: The Structure of the Book 21
CHAPTER 2: What Is “Capital” Management? 24
2.1 Regulatory Capital and the Evolution toward Basel II 25
2.2 Overview of the Basel II Capital Accord 27
2.3 Bank Estimates of Required Capital and the Different Notions of Bank Capital 34
2.4 Summary 39
2.5 Further Reading 40
CHAPTER 3: Market Risk 42
3.1 The Variance–Covariance Approach 43
3.2 Simulation Approaches: Historical Simulation and Monte Carlo Simulation 62
3.3 Value at Risk for Option Positions 68
3.4 Extreme Value Theory and Copulas 72
3.5 Expected Shortfall and the Problem of VaR Nonsubadditivity 74
3.6 Back-Testing Market Risk Models 76
3.7 Internal VaR Models and Market Risk Capital Requirements 79
3.8 Stress Tests 80
3.9 Summary 81
3.10 Further Reading 82
CHAPTER 4: Credit Risk 84
4.1 Defining Credit Risk: Expected and Unexpected Losses 84
4.2 Agency Ratings 87
4.3 Quantitative Techniques for Stand-Alone Credit Risk Evaluation: Moody’s/KMV EDF and External Scoring Systems 91
4.4 Capital Requirements for Credit Risk under Basel II 97
4.5 Internal Ratings 99
4.6 Estimating Loss Given Default 106
4.7 Estimating Exposure at Default 109
4.8 Interaction between Basel II and International Accounting Standards 110
4.9 Alternative Approaches to Modeling Credit Portfolio Risk 113
4.10 Comparison of Main Credit Portfolio Models 125
4.11 Summary 129
4.12 Further Reading 130
CHAPTER 5: Operational Risk and Business Risk 132
5.1 Capital Requirements for Operational Risk Measurement under Basel II 133
5.2 Objectives of Operational Risk Management 135
5.3 Quantifying Operational Risk: Building the Data Sources 136
5.4 Quantifying Operational Risk: From Loss Frequency and Severity to Operational Risk Capital 142
5.5 Case Study: U.S. Bank Progress on Measuring Operational Risk 148
5.6 The Role of Measures of Business Risk and Earnings at Risk 151
5.7 Measuring Business Risk in Practice: Defining a Measure of Earnings at Risk 154
5.8 From Earnings at Risk to Capital at Risk 156
5.9 Summary 159
5.10 Further Reading 160
CHAPTER 6: Risk Capital Aggregation 162
6.1 The Need for Harmonization: Time Horizon, Confidence Level, and the Notion of Capital 163
6.2 Risk Aggregation Techniques 165
6.3 Estimating Parameters for Risk Aggregation 170
6.4 Case Study: Capital Aggregation within Fortis 176
6.5 A Synthetic Comparison of Alternative Risk Aggregation Techniques 181
6.6 Summary 183
6.7 Further Reading 184
CHAPTER 7: Value at Risk and Risk Control for Market and Credit Risk 186
7.1 Defining VaR-Based Limits for Market Risk: Identifying Risk-Taking Centers 188
7.2 Managing VaR Limits for Market Risk: The Links between Daily VaR and Annual Potential Losses 190
7.3 Managing VaR-Based Trading Limits 196
7.4 Identifying Risk Contributions and Internal Hedges: VaRDelta, Component VaR, and Incremental VaR 199
7.5 Managing Risk and Pricing Limits for Credit Risk 206
7.6 Summary 210
7.7 Further Reading 211
CHAPTER 8: Risk-Adjusted Performance Measurement 212
8.1 Business Areas, Business Units, and the Double Role of Risk-Adjusted Performance Measures 213
8.2 Checking the Measure of Profit 213
8.3 Capital Investment versus Capital Allocation 216
8.4 Choosing the Measure of Capital at Risk: Allocated Capital versus Utilized Capital 216
8.5 Choosing the Measure of Capital at Risk: Diversified Capital versus Undiversified Capital 219
8.6 Choosing the Risk-Adjusted Performance Measure: EVA vs. RAROC 224
8.7 Variants and Potential Extensions 226
8.8 Risk-Adjusted Performances and Managers’ Performance Evaluation 229
8.9 Summary 232
8.10 Further Reading 233
CHAPTER 9: Risk-Adjusted Performance Targets, Capital Allocation, and the Budgeting Process 234
9.1 From the Bank’s Cost of Equity Capital to Performance Targets for the Bank 235
9.2 Should Business Units’ Target Returns Be Different? 239
9.3 Capital Allocation and the Planning and Budgeting Process 244
9.4 Case Study: Capital Allocation Process at UniCredit Group 247
9.5 Summary 250
9.6 Further Reading 251
Final Remarks 254
Selected Free Risk Management–Related Websites 256
References 262
Index 272

Produkt-Details

• Erscheint lt. Verlag: 26.7.2010
• Sprache: englisch
• Themenwelt: Sachbuch/Ratgeber ► Beruf / Finanzen / Recht / Wirtschaft ► Geld / Bank / Börse
• Themenwelt: Recht / Steuern ► Wirtschaftsrecht
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• Themenwelt: Betriebswirtschaft / Management ► Spezielle Betriebswirtschaftslehre ► Bankbetriebslehre
• ISBN-10: 0-08-047106-4 / 0080471064
• ISBN-13: 978-0-08-047106-8 / 9780080471068