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

More documents

Recommendations

Info

Capital Budgeting in Banks 275 Liquid Illiquid Capital Budgeting Systematic Market Risk RISK Value Creation Capital Structure Credit Risk Risk Management Specific Operational Risk Overview of the components of a normative theory for risk man- Figure 6.9 agement. the bank has a competitive advantage and where it could really create value— despite the fact that it is costly for the bank to hold these risks. Therefore, this appears not to be an option for the bank. Thus, only the second option is viable. It can be achieved in three ways: 143 1. Increasing actual capital: As indicated previously, the institution’s credit risk is inversely related to its available real equity capital. However, when a bank increases equity capital, the exact effects on economic capital and its associated costs must be considered. If a bank raises its equity to expand its business (at the same riskiness), this does not lower the costs of total risk. Therefore, equity would have to be invested in projects that have a negative internal beta to the existing portfolio. Neither an investment in risk-free assets nor the repayment of debt changes the bank’s required economic capital. 144 But both actions change the cost of total risk, assuming that the other operations are left unchanged. However, holding equity 143 See Stulz (2000), p. 4-37. 144 See Stulz (2000), p. 4-39.
276 RISK MANAGEMENT AND VALUE CREATION IN FINANCIAL INSTITUTIONS capital has an opportunity cost. 145 Therefore, holding enough equity to make risk management irrelevant is not an option for the bank. 146 2. Selecting projects according to their impact on total risk: Selecting projects in order to improve the (internal) diversification of the bank’s portfolio, to manage risk, is also expensive. On the one hand, as a market benchmark, one can observe that the diversification discount for conglomerates vis-à-vis a portfolio of their specialized competitors is approximately 14%. 147 On the other hand, expanding into unfamiliar sectors can be very costly, because this often adds an additional (and costly) management layer or can lead to unexpected high credit losses. 148 However, in our model, these costs have to be balanced against the cost savings in total risk costs. Note that, in contrast, Zaik et al. (1996) claim that RAROC gives the message that internal diversification pays off in any case—even beyond familiar business segments. 3. Using derivatives to hedge and other (financial) risk-management instruments to shed risks: Applying these risk-management instruments in liquid markets is the most cost-efficient way to reduce firm-wide risk. Therefore, a bank should evaluate the total risk contribution of a new transaction only after carrying out these hedging activities. 149 However, and as we will see in the implications below, the cost of these instruments has to be lower than the total risk costs of these transactions. The application of this model leads us to the following practical implications for risk management in banks: 145 Shareholders expect the CAPM return on equity—which is not costly in an economic sense. However, when a bank uses equity to buy back debt, this gives a windfall to the existing debt holders (making their debt safer) and therefore redistributes some of the benefits of increasing equity capital to other stakeholders. Moreover, a part of the tax shield is lost for the bank when debt is bought back. Other information asymmetries and agency costs (e.g., managerial discretion) as well as the transaction costs (of issuing new capital) also make new equity expensive. For a detailed discussion of these effects, see also Chapter 3. 146 See Stulz (2000), p. 4-39. 147 See Stulz (2000), p. 4-40. 148 See, for example, Winton (2000), p. 3. Increased competition may magnify the “Winner’s Curse” problem faced by a bank on the entry into a new lending area, making diversification very costly. Banks—facing greater competition—may therefore find it more attractive to specialize. 149 Note that this is partly what RAROC does via transfer pricing.
Page 2:
isk management and value creation i
Page 5 and 6:
Copyright © 2002 by John Wiley & S
Page 8 and 9:
preface From an empirical as well a
Page 10:
acknowledgments No book is solely t
Page 13 and 14:
x CONTENTS Goals of Risk Management
Page 15 and 16:
xii CONTENTS Definition of RAROC 24
Page 17 and 18:
xiv FIGURES Figure 5.5 Figure 5.6 F
Page 19 and 20:
symbols ↑ ↓ α β i xvi Increas
Page 21 and 22:
xviii SYMBOLS ln Natural logarithm
Page 23 and 24:
abbreviations APT BIS bn bps CAPM C
Page 25 and 26:
2 RISK MANAGEMENT AND VALUE CREATIO
Page 27 and 28:
Page 29 and 30:
Page 32 and 33:
CHAPTER 2 Foundations for Determini
Page 34 and 35:
Foundations for Determining the Lin
Page 36 and 37:
Page 38 and 39:
Page 40 and 41:
Page 42 and 43:
Page 44 and 45:
Page 46 and 47:
Page 48 and 49:
Page 50 and 51:
Page 52 and 53:
Page 54 and 55:
Page 56 and 57:
Page 58 and 59:
Page 60 and 61:
Page 62 and 63:
Page 64 and 65:
Page 66 and 67:
Page 68 and 69:
Page 70 and 71:
Page 72 and 73:
Page 74 and 75:
Page 76:
Page 79 and 80:
56 RISK MANAGEMENT AND VALUE CREATI
Page 81 and 82:
Page 83 and 84:
Page 85 and 86:
Page 87 and 88:
Page 89 and 90:
Page 91 and 92:
Page 93 and 94:
Page 95 and 96:
Page 97 and 98:
Page 99 and 100:
Page 101 and 102:
Page 103 and 104:
Page 105 and 106:
Page 107 and 108:
Page 109 and 110:
Page 111 and 112:
Page 113 and 114:
Page 115 and 116:
Page 117 and 118:
Page 119 and 120:
Page 121 and 122:
Page 123 and 124:
100 RISK MANAGEMENT AND VALUE CREAT
Page 125 and 126:
Page 127 and 128:
Page 129 and 130:
Page 131 and 132:
Page 133 and 134:
Page 135 and 136:
Page 137 and 138:
Page 139 and 140:
Page 141 and 142:
Page 143 and 144:
Page 145 and 146:
Page 147 and 148:
Page 149 and 150:
Page 151 and 152:
Page 153 and 154:
Page 155 and 156:
Page 157 and 158:
Page 159 and 160:
Page 161 and 162:
Page 163 and 164:
Page 165 and 166:
Page 167 and 168:
Page 169 and 170:
Page 171 and 172:
Page 173 and 174:
Page 175 and 176:
Page 177 and 178:
Page 179 and 180:
Page 181 and 182:
Page 183 and 184:
Page 185 and 186:
Page 187 and 188:
Page 189 and 190:
Page 191 and 192:
Page 193 and 194:
Page 195 and 196:
Page 197 and 198:
Page 199 and 200:
Page 201 and 202:
Page 203 and 204:
Page 205 and 206:
Page 207 and 208:
Page 209 and 210:
Page 211 and 212:
Page 213 and 214:
Page 215 and 216:
Page 217 and 218:
Page 219 and 220:
Page 221 and 222:
Page 223 and 224:
Page 225 and 226:
Page 227 and 228:
Page 229 and 230:
Page 231 and 232:
Page 233 and 234:
Page 235 and 236:
Page 237 and 238:
Page 239 and 240:
Page 241 and 242:
Page 243 and 244:
Page 245 and 246:
Page 247 and 248: 224 RISK MANAGEMENT AND VALUE CREAT
Page 297: 274 RISK MANAGEMENT AND VALUE CREAT
Page 316 and 317: eferences Aguais, Scott D., and Ant
Page 318 and 319: References 295 Blanden, Michael (19
Page 320 and 321: References 297 and Abuses,” Journ
Page 322 and 323: References 299 Froot, Kenneth A., a
Page 324 and 325: References 301 risiken aus Handelsg
Page 326 and 327: References 303 Investments in Stock
Page 328 and 329: References 305 Institute of Technol
Page 330 and 331: References 307 Sharpe, William F. (
Page 332: References 309 Wall, L.D., and John
Page 335 and 336: 312 INDEX Approach (continued) top-
Page 337 and 338: 314 INDEX Capital: Tier-1, 139, 146
Page 339 and 340: 316 INDEX Credit: derivatives, 178,
Page 341 and 342: 318 INDEX Expectations: homogeneous
Page 343 and 344: 320 INDEX Incentive(s), 22, 33, 45,
Page 345 and 346: 322 INDEX Managers, poorly diversif
Page 347 and 348: 324 INDEX Overinvestment, 75, 79, 8
Page 349 and 350:
326 INDEX Reserve(s) (continued) lo
Page 351 and 352:
328 INDEX Risk, liquidity, 3, 165 R
Page 353 and 354:
330 INDEX Sharpe ratio, 244, 252 Sh
Page 355:
332 INDEX Value at risk (VaR) (cont
show all

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

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?