Index 317 Discretion, managerial, 82, 97, 276 Dis<strong>in</strong>termediation, 29 Distance to default, (normalized), 225–226, 229, 233–234 Distribution: (net) asset (value), 23, 80, 150, 158–159, 162, 216, 220, 224 cut-off po<strong>in</strong>t, 204 earn<strong>in</strong>gs, 215 economic return, 215 empirical, 190, 195, 225 extreme tail, 158 firm value, 80 ga<strong>in</strong>s <strong>and</strong> losses, 166, 214 loss, 182, 185, 202 moment(s) of a, 217 skewed, 151, 202, 204 tail of, 158, 183–184 value (change), 150, 158–159 Distribution (function): beta, 184–185, 204 b<strong>in</strong>omial, 177, 184 lognormal, 221, 225 non-normal, 151 normal, 168, 177, 183, 189–190, 223, 225, 228–229, 233, 248 uniform, 177 Diversification, 26, 28, 40–42, 56, 60, 62, 65–66, 69, 71, 74, 86, 103, 122, 136, 141, 157, 159, 176, 178, 182, 185, 200, 209, 212– 213, 142, 260, 270, 276, 278 Divest<strong>in</strong>g, 1, 7 Dividend: decision(s), 12, 14 policy, 63, 121 Doctr<strong>in</strong>e, “too-big-to-fail”, 110, 123, 142, 147, 230 Dom<strong>in</strong>o effect(s), 22 DP. See Default po<strong>in</strong>t Drift rate, 221 Due diligence, 41 Earn<strong>in</strong>g(s), 31–32, 38–39, 61, 70–71, 87, 89, 120, 149, 157, 192– 193, 215, 239, 245 economic, 120, 242 pretax, 120 residual, 244 Economic <strong>Value</strong> Added (EVA ® ), <strong>in</strong> banks, 244, 290 Economy, local or regional, 140 EL. See Loss(es), expected Empire build<strong>in</strong>g, 82 Empirical, evidence, on l<strong>in</strong>k between risk management <strong>and</strong> value creation, 6, 9, 43, 46–48, 55, 287 Eng<strong>in</strong>eer<strong>in</strong>g, f<strong>in</strong>ancial 44 Entity: approach, 14–15 value, 15 Environment: bus<strong>in</strong>ess, 208 <strong>com</strong>petitive, 157, 207–208 economic, 131, 216 f<strong>in</strong>ancial, 56 market, 157 operat<strong>in</strong>g, 157 Equilibrium, 76, 132, 155, 261, 280 Equity: approach, 2, 240, 256 as scarce resource, 239 <strong>in</strong>vestment, 105, 245 Estimation horizon or period, 172– 174, 186 Eurobonds, sovereign, 175 EVA ® . See Economic <strong>Value</strong> Added Evaluation, risk-neutral, 223, 225, 228 Event(s): downside, 151 extreme, 195 non-credit-risk, 196 nonmarket, 196 nonrecurr<strong>in</strong>g, 245 Event loss database, 202 Event risk. See <strong>Risk</strong>, event Event studies, 47 EVT. See Extreme value theory Exam<strong>in</strong>ation process, regulatory, 145, 214 Existence of banks, 72, 79, 114, 138, 199 of firms, 72
318 INDEX Expectations: homogeneous, 59, 277 tail conditional, 218–219 Expected Default Frequency (EDF), 172. See also Probability of default (PD) Expected losses (EL). See Loss(es), expected Expense(s): allocation of, 241 direct, 243 <strong>in</strong>direct, 243 non-<strong>in</strong>terest, 209, 243 rigid, 205, variable, 205 Exposure, 26, 28, 38, 44, 46, 63, 70, 74, 77, 83, 85, 88, 96, 102– 103, 110–111, 114–115, 120, 123, 130, 135–136, 149, 166, 170, 172–174, 176–177, 179, 198–200, 210, 237 Externalities, 22, 75, 144 Extreme value theory (EVT), 183, 194–195, 218 Failure, 42, 56, 110, 122, 150, 173, 196–197, 204 FDIC. See Federal Deposit Insurance Corporation Federal Deposit Insurance Corporation (FDIC), 110, 143– 144 Fee(s), 124, 197, 243 F<strong>in</strong>ance theory conventional, 274 neoclassical, 2, 5–6, 21, 33–34, 39, 58, 67, 70–72, 136, 138, 240, 253, 269, 272, 279–281, 287– 288 <strong>and</strong> risk management, 61–64. See also <strong>Risk</strong> management irrelevance proposition as partial solution, 74, 289 assumptions of, 2, 4, 58–60, 129, 247, 290 corollaries with regard to risk management, 61 discrepancies to practice, 72 relaxation of the assumptions of, 75–79 neo<strong>in</strong>stitutional, <strong>and</strong> risk management, 74, 123, 129, 132, 136, 285, 288–289 <strong>in</strong>centive-based approaches, 75 transaction-cost-based approach, 76 F<strong>in</strong>ancial distress, 30, 80, 82, 90, 104–111, 123, 164, 166, 269, 288 costs. See Cost(s) of f<strong>in</strong>ancial distress F<strong>in</strong>ancial: <strong>in</strong>stitution(s). See Bank(s) <strong>in</strong>termediation, 2. See also Intermediation leverage. See Leverage policy, 42, 62, 135 risk bus<strong>in</strong>ess, 3, 29, 48, 287 system. See Bank<strong>in</strong>g system F<strong>in</strong>anc<strong>in</strong>g: decisions, irrelevance of, 61, 249 default-free, 154 opportunities, chang<strong>in</strong>g, 103 Firm(s): closely held, 82, 84, 89, 130 widely held, 24, 60, 78, 130 Firm objective function, 9, 27, 100 characteristics of, 13 concave, 85, 87, 91, 100, 112 Firm value: after f<strong>in</strong>ancial distress costs, 106 after-tax, 116 before f<strong>in</strong>ancial distress costs, 106 maximization of, 11, 33, 56 Fisher separation, 11 Flexibility, as source for value creation, 68 Flows-to-entity approach. See Entity, approach Flows-to-equity approach. See Equity, approach Fluctuations, economic, 64 Forward(s), 40, 56, 118, 278 Framework: capital-budget<strong>in</strong>g, 238
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isk management and value creation i
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Copyright © 2002 by John Wiley & S
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preface From an empirical as well a
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acknowledgments No book is solely t
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x CONTENTS Goals of Risk Management
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xii CONTENTS Definition of RAROC 24
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xiv FIGURES Figure 5.5 Figure 5.6 F
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symbols ↑ ↓ α β i xvi Increas
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xviii SYMBOLS ln Natural logarithm
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