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

Capital Structure in Banks 235
Assessment of the Suggested Approach We have introduced this new top-down
approach for deriving economic capital because we wanted to check the results
from the differentiated bottom-up measurement. We can observe that the
difference between the reported and the inferred economic capital amount
(via the newly suggested approach) is small (below 5%). 464 One is, therefore,
tempted to conclude that the two approaches lead to very similar results
and that one would be indifferent as to which one should be used. 465
However, Deutsche Bank does not report whether it considered correlations
between the various types of risk to aggregate their bottom-up results
to arrive at the final overall economic capital amount. If this is not the
case, one can conclude that—since the top-down approach considers also
macroeconomic risks and risks ignored by the three suggested bottom-up
risk measurement approaches—the effects of ignoring the correlations and
the risks that were unconsidered just canceled out. On the other hand, if
correlations are considered in the aggregation process, we can then conclude
that the bottom-up approach is fairly comprehensive and accurate. However,
given that we have only two data points, neither of these two conclusions
has to be the case.
Likewise, we cannot conclude from the results that the capital requirement
in the top-down perspective is (always) higher for Deutsche Bank than
what is reflected in the bottom-up procedure, because the top-down approach
uses market data that includes more comprehensive information than what
the bank can estimate internally. 466 If such a difference can be consistently
observed, the bottom-up results could then be used as a basis for reallocating
the difference back to individual transactions.
However, the above-derived results are heavily dependent on the input
parameters. Since there were not enough data points available to calibrate
the model to declare it robust, we are not able to conduct a full sensitivity
analysis of all the input factors. However, when implementing the suggested
approach, we found two effects worthwhile mentioning:
464 This obviously assumes that Deutsche Bank uses a one-year horizon for calculating
capital requirements from the bottom up. However, according to anecdotal evidence,
this is the current best practice approach in the banking industry.
465 Taking this line of thought to the extreme, and if one is only interested in the
aggregate amount, one would conclude that a bank could save the costs and efforts
of detailed bottom-up risk measurement. However, although it would avoid going
through this hassle, the bank would not be able to understand the sources of its risks.
466 When implementing the model, we tested various other assumptions that lead to
results being both higher and lower than what is published from the bottom-up
procedure.