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34 RISK MANAGEMENT AND VALUE CREATION IN FINANCIAL INSTITUTIONS
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Motivation of employee and subsidiary behavior: 141 The goal of risk
management is to remove certain risk factors that cannot be influenced
by these stakeholder groups in order to motivate their appropriate
behavior in the areas that they can influence.
As already observed, the difficulty is to strike the right balance among
these various stakeholder views and to find out which view (should)
dominate(s) the others. 142
Choice of the Risk Dimension Another dimension for the choice of the goal for
risk management is which type of risk should be managed—systematic
(market-wide) or (firm-) specific risk. 143 From a theoretical point of view,
the answer to this question would be fairly clear. If one assumes that one is
in a neoclassical finance world and that financial risks are mostly unsystematic,
then transferring these specific risks to efficient capital markets does
not influence the firm’s value. It only shifts the firm along the Security Market
Line (SML). 144 Therefore, a bank should only manage its systematic risks.
However, in practice, we can observe that most of the risk-management
actions within a bank try to address specific issues at the individual transaction
level, that is, banks try to focus on specific risks and mostly neglect
the overall portfolio perspective (systematic risks).
Yet, if we look at stock market data, we can observe for banks that over
time specific risk tends to increase (measured as percentage of overall risk)
and systematic risk tends to decrease (see Figure 2.5).
We have derived these results in the following way: In order to avoid the
effects of idiosyncratic influences at the individual bank level, we selected a
banking industry level index (DJ EURO STOXX BANK) and a broad market
index (DJ EURO STOXX 50) for the time period January 1, 1992 to
December 31, 1999 and obtained respective data from Datastream. We then
calculated daily returns on the banking industry (B) as well as the broad
market index (M):
R
it ,
Sit
,
= ln
⎛ ⎞
⎝ ⎜ S
⎟
⎠
it , −1
(2.2)
141 See Glaum and Förschle (2000), pp. 19+.
142 See Smith (1995), p. 20.
143 For a definition see above.
144 See Copeland and Weston (1988), pp. 197+, for a discussion of the security market
line in the context of the CAPM.