Risk Management and Value Creation in ... - Arabictrader.com

Rationales for Risk Management in Banks 115
■
Therefore, risk management at the firm level can create shareholder
value, when it guarantees a certain (observable) risk profile
to which shareholders need to adjust their portfolios only once, 332
which will, in turn, save transaction costs. Likewise, the firm (and
especially banks) can set their long-run “target” capital structure when
they commit to a certain risk profile (and hence rating). By only taking
risks that are in line with this risk profile, 333 the firm can avoid the
costly adjustment of the current capital structure to achieve this target
in the short run. 334
Managers/firms are often not willing to disclose inside information
to investors (and hence the public in general) because this proprietary
information could be exploited by competitors. This is also
true with regard to the detailed disclosure of risk exposures, riskmanagement
policies, and which risk-management tools are used
within firms and to what degree. This is especially true for banks,
for whom the management of risk is the most important source of
competitive advantage. Given the current reporting of firms and
banks, risk transparency (inside and outside the firm) is only rarely
found, and so investors have to try and reveal this private information,
which is—due to transaction costs—costly. However, risk
management can be used as a substitute for the publication of internal
information. 335 As long as it guarantees a stable risk profile of
the firm and the costs for conducting the necessary risk management
are lower than the costs associated with the information disclosure,
it can increase the value of the firm. 336 The same argument is valid
for another facet of the same problem on a different (not the firm)
level: Banks, in particular, use risk management to create assets or
products with stable distributions so that customers can save on both
transaction and participation 337 costs.
332 See Mason (1995), pp. 31–32.
333 See Shimko and Humphreys (1998), p. 33.
334 See Froot and Stein (1998a), p. 60.
335 Albeit there are many advantages of increasing the transparency (especially of
banks) via better disclosure and educating the analysts’ community—as suggested by
Shimko and Humphreys (1998), p. 33—it can be counterproductive and even dangerous
to do so for strategic and competitive reasons.
336 See DeMarzo and Duffie (1992) and Smithson (1998), pp. 9–10.
337 As defined in Allen and Santomero (1996), p. 1.