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

284 RISK MANAGEMENT AND VALUE CREATION IN FINANCIAL INSTITUTIONS
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marginal calculation for new business and the internal beta for existing
business needs further elaboration and research.
Effects of the trade-off between capital structure and total risk costs:
There is very little knowledge about the effects of changing the actual
capital structure on the total risk costs and how these effects
could be modeled in a neoinstitutional world (also see first area
indicated in this list).
Intertemporal consequences for risk management: Our model (and
basically also RAROC 181 ) has avoided dealing with multiperiod issues
so far. However, these issues are exactly the ones that are most
relevant with regard to value creation. For instance, it is unresolved
as to how the required return in the two-factor model and economic
capital would have to be determined in a multiperiod setting. If the
measurement horizon H is expanded, then the confidence level α
would be lower, because default over, for example, a five-year horizon
is much more likely than over one-year horizon. At first glance,
the consequence would appear to be that the capital requirement
would, therefore, be lower. However, the bank has to hold enough
economic capital in each of the years not to default (i.e., the marginal,
not the cumulative, default probability counts). Additionally,
there are many more intertemporal issues associated with risk management,
such as the fact that it is unclear whether short-term optimal
risk management leads to long-term value maximization. These
are subject to further research (and empirical testing, see the next
area).
Empirical tests: Currently, conducting empirical tests of whether the
previously discussed capital-budgeting tools (both RAROC 182 and
the new approaches) are correlated with value creation in banks (as
indicated by their market capitalization) is very difficult because of
the lack of appropriate data. Even though the suggested top-down
procedure to estimate the required amount of economic capital
(as discussed in the “Suggestion of an Approach to Determine Economic
Capital from the Top Down” section of Chapter 5) would
be a promising starting point, it needs more published or publicly
available economic capital numbers to calibrate the model. This,
however, has the caveat that currently there is no consistent reporting
of economic capital numbers (consistent confidence levels and
181 We have already referred to multiperiod expansion of RAROC. See, for example,
Brüning and Hoffjan (1997) and Schröck and Windfuhr (1999).
182 Despite the theoretical concerns, it is still a widely used performance measure in
practice.