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Rationales for Risk Management in Banks 73
market participation. 91 This is due to the fact that there are fixed 92 and
marginal 93 costs in order to be able to participate in markets. Uninformed
investors can gain access to the markets through the intermediary’s services.
This adds value to the transaction by reducing the (perceived) participation
costs of the uninformed investor. Therefore, participation costs can explain
the fact that intermediaries trade risk and undertake risk management. Such
costs can also explain why investors prefer to hold debt or debtlike instruments
94 or assets with a relatively stable risk profile that are (synthetically)
created by banks by using derivatives, so that investors do not have to monitor
the expected distribution of returns. 95
Likewise, banks do extensively conduct risk management 96 and—as many
surveys and annual reports convey—see risk management as one of their
most important corporate objectives or core competencies, 97 even if—as we
have seen—the neoclassical theory predicts that corporate risk management
cannot create any value. However, banks manage their risks with the purpose
of increasing value, and there is anecdotal evidence that banks with
superior risk-management skills and systems outperform their competitors. 98
Similarly, there must be some benefit to conducting risk management at the
firm level, because we can observe a subjective and normative view that risk
management is good and necessary, which is also reflected in many regulatory
requirements. 99
We have described previously that the increase in the volatility in financial
markets translates into an increased volatility of firm values. Since it is
often claimed that risk management can reduce this volatility (and that this
91 For an extensive list of literature on this empirical evidence see Allen and Santomero
(1996), pp. 22–23, and for a critique of this reasoning, see Scholtens and van Wensveen
(2000).
92 These are costs of learning about the financial instruments and how the market
works. Fixed participation costs are not transaction costs.
93 For example, the costs of monitoring the markets on a day-to-day basis.
94 These types of securities typically have low participation costs.
95 See Allen and Santomero (1996), pp. 22–24.
96 Even though it is—in the neoclassical world—irrelevant for shareholders, they
demand that managers pursue risk management, see Mason (1995), p. 29.
97 See, for example, Deutsche Bank (1999), p. 123, Raposo (1999), p. 41.
98 See Shimko and Humphreys (1998), p. 33, who claim that risk management is very
important over the long run, because a company’s stock will outperform as losses are
avoided. Similarly, they claim that good risk-management systems will have the same
effect.
99 For instance the “Mindestanforderungen an das Betreiben von Handelsgeschäften”
(1995) for banks and the “Gesetz zur Kontrolle und Transparenz im
Unternehmensbereich (KonTraG)” (1998) for industrial companies in Germany reflect
this view.