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Index 321 at the transaction level, 249–254 constant, 97 decrease in, 156, 280 effects of changes in, 140, 246, 283 excessive, 95, 99, 146 increase in, 96, 123, 126, 130, 288–289 optimal, 138. See also Capital structure, optimal Liability(ies): (default-free) customer, 154 fixed, 154 junior, 156–157 limited, 101, 121, 149, 221 off-balance sheet, 165, 226–227, 231 on-balance sheet, 149, 165, 226 Liability holder(s), 3, 122, 141 Liability management, 2, 15 Likelihood of bank default, 22–23, 42, 82 Likelihood of default, 79, 81, 89–90, 125, 132, 288. See also Probability of default central role of, 80 Limit setting. See Risk, limiting Liquidation, 107, 191, 215 Liquidity, 3, 28, 109, 157, 165, 186, 191, 197, 230 Loan loss reserves, 140, 148, 161, 171. See also Reserves, loan loss Loan(s), 25, 42, 79, 113, 145, 149, 170, 174, 176, 179–180, 186, 260 pricing, 171, 273 secured, 175, 177 unsecured, 177 Loan origination, 281 Loan portfolio, 140, 161, 176, 181, 186 Loss(es): actual, 174 actuarial 152. See also Loss(es), expected or credit credit, 5, 169, 171, 175–176, 184, 239, 243–244, 276, 282, 285 economic, 152, 170 expected (credit), 5, 74, 145, 150– 151, 158, 161, 171–173, 175– 176, 178–179, 182, 198, 201– 203, 210, 217, 243, 251, 263, 268 expected, due to event risk, 203 maximum, 168 residual, 81, 153 unexpected, 5, 74, 145, 150, 175– 183, 185, 198, 202–203, 263, 268 contribution, 171, 175, 178–180, 182–183 standalone, 171, 176 Loss given default (LGD), 111, 172 Loss in the event of default (LIED). See Loss given default (LGD) Loss leader, 262 Loss prevention by process control, 278 Loss rate (LR), 172–179, 198 Loss volatility, 180, 215 Lottery ticket, 168 Lower partial moment (LPM), 217–218 Lower-tail outcome(s), 23, 30, 33, 39, 112, 132, 135, 168, 225, 288– 290 Loyalty, 89 LR. See Loss rate (LR) Lumpiness, 185, 202. See also Concentration M&A. See Mergers and acquisitions M&M: assumptions of, 59, 63, 68, 71, 78, 102, 138 capital structure irrelevance proposition, 64 proposition I, turning upside down, 78–79 proposition(s), 59, 83, 98, 129, 138, 249 risk class, 2, 72 Management action, normative, 265 incentive structure, 77
322 INDEX Managers, poorly diversified, 83 Margins: narrow, 15, 241 pressure on, 239 Market(s): (highly) liquid, 28, 43, 47, 186, 191, 246, 272, 276–278, 280 complete, 2, 58, 61–62, 64, 66–67, 72, 74, 97 efficient, 2, 11, 14, 28, 47 frictionless, 58–59, 61, 247 illiquid, 42, 134, 272, 280 imperfect(ions), 12–13, 28, 74, 79, 97–98, 101, 114, 116, 121, 125, 129, 135, 137 information-efficient, 59 perfect, 2, 12, 14, 28, 58, 62, 98, 134 spot, 40–41 Market capitalization, 2, 16, 18, 149, 219, 240, 282, 284 Market conditions, adverse, 186, 193 Market crash, 195 Market discipline, 143, 216 Market expectation(s), 47 Market for corporate control, 1, 10, 81 Market imperfections, other, 79, 116, 121 Market index, broad (M). See Market portfolio, broad Market index. See Market portfolio, broad Market inefficiencies, 78, 121, 123, 125, 277 Market making, 281 Market model. See Model, market Market participant(s), 3, 28–29, 41, 47, 56, 58–59, 61, 63, 72, 74, 76, 136, 156–157, 178, 273, 277 Market participation, 73 Market players. See Market participants Market portfolio, broad, 5, 16–18, 34, 36, 136, 168, 195, 210, 237, 246, 254, 256, 261, 266, 288, 290 Market price: of risk, 271, 291 fair, 62, 70, 124, 132, 270, 274, 277 Market risk. See Risk, market Market terms, fair, 67, 69, 97, 270 Market theory, neoclassical, 11 Market value: fair, 41, 149, 270, 277 of assets, 110, 148–149, 151, 220, 222, 226–227, 231, 247, 248, 260 of debt, 14–15, 81, 91, 93, 222, 247, 264 (of) firm, 76, 91, 121, 130, 221 of equity, 14, 81, 149, 156, 161, 220, 222, 227, 231, 236, 267 of liabilities, 15, 149, 151, 156, 226 Market-to-book ratio, 104 Mark to market, 120, 149, 166, 186, 241 Markov, 174, 195 Matched duration, 246 Matrix: migration. See Migration matrix transition. See Transition matrix Maturity, 15, 28, 45, 147, 165, 172, 222–223, 226, 228, 247 Measure(s): accounting-based, 149, 164 economic, 10, 161 of dispersion, 24 of total risk, 6, 135, 237, 289 Measurement: period, 167, 185, 214, 237, 244, 252, 263 process, 210 Mergers and acquisitions (M&A), 10, 18 Merton and Perold model. See Model, two-factor Metallgesellschaft, 86, 114 Method(s): allocation, 244 transfer, 244 Migration, 170, 176, 178 matrix, 174
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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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abbreviations APT BIS bn bps CAPM C
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2 RISK MANAGEMENT AND VALUE CREATIO
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CHAPTER 2 Foundations for Determini
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Foundations for Determining the Lin
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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: 320 INDEX Incentive(s), 22, 33, 45,
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
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