Risk Management and Value Creation in Financial Institutions
Rights Contact Login For More Details
- Wiley
More About This Title Risk Management and Value Creation in Financial Institutions
English
GERHARD SCHRoECK has been a senior management consultant with Oliver, Wyman & Company in Frankfurt and London since 1997, where his specialty is to advise financial institutions on risk management issues and value creation. He received his PhD in finance and his MA in business administration from the University of Augsburg, Germany, and an MBA from the Joseph M. Katz Graduate School of Business at the University of Pittsburgh.
English
Figures.
Tables.
Symbols.
Abbreviations.
INTRODUCTION.
FOUNDATIONS FOR DETERMINING THE LINK BETWEEN RISK MANAGEMENT AND VALUE CREATION IN BANKS.
Value Maximization in Banks.
Value Maximization as the Firm's Objective.
Valuation Framework for Banks.
Problems with the Valuation Framework for Banks.
Empirical Conundrum.
Other Stakeholders' Interests in Banks.
Risk Management in Banks.
Definition of Risk.
Definition of Risk Management.
Role and Importance of Risk and Its Management in Banks.
Link between Risk Management and Value Creation in Banks.
Goals of Risk Management in Banks.
Choice of the Goal Variable.
Choice of the Stakeholder Perspective.
Choice of the Risk Dimension.
Choice of the Risk-Management Strategy.
Ways to Conduct Risk Management in Banks.
Eliminate/Avoid.
Transfer.
Absorb/Manage.
Empirical Evidence.
Summary.
Appendix.
Part A: Bank Performance.
Part B: Systematic versus Specific Risk.
RATIONALES FOR RISK MANAGEMENT IN BANKS.
Risk Management and Value Creation in the Neoclassical Finance Theory.
The Neoclassical Finance Theory.
Corollaries from the Neoclassical Finance Theory with Regard to Risk Management.
The Risk Management Irrelevance Proposition.
Summary and Implications.
Discrepancies Between Neoclassical Theory and Practice.
Risk Management and Value Creation in the Neoinstitutional Finance Theory.
Classification of the Relaxation of the Assumptions of the Neoclassical World.
The Central Role of the Likelihood of Default.
Agency Costs as Rationale for Risk Management.
Agency Costs of Equity as a Rationale for Risk Management.
Agency Costs of Debt as a Rationale for Risk Management.
Coordination of Investment and Financing.
Transaction Costs as a Rationale for Risk Management.
The Costs of Financial Distress.
The Costs of Implementing Risk Management.
The Costs of Issuance.
The Costs of a Stable Risk Profile.
Taxes and Other Market Imperfections as Rationales for Risk Management.
Taxes.
Other Market Imperfections.
Additional Rationales for Risk Management in Banks.
Summary and Conclusions.
Appendix.
IMPLICATIONS OF THE PREVIOUS THEORETICAL DISCUSSION FOR THIS BOOK.
CAPITAL STRUCTURE IN BANKS.
The Role of Capital in Banks.
Capital as a Means for Achieving the Optimal Capital Structure.
Capital as Substitute for Risk Management to Ensure Bank Safety.
The Various Stakeholders' Interests in Bank Safety.
Available Capital.
Required Capital from an Economic Perspective.
Determining Capital Adequacy in the Economic Perspective.
Summary and Consequences.
Derivation of Economic Capital.
Types of Risk.
Economic Capital as an Adequate Risk Measure for Banks.
Ways to Determine Economic Capital for Various Risk Types in Banks (Bottom-Up).
Credit Risk.
Market Risk.
Operational Risk.
Aggregation of Economic Capital across Risk Types.
Concerns with the Suggested Bottom-Up Approach.
Suggestion of an Approach to Determine Economic Capital from the Top Down.
Theoretical Foundations.
Suggested Top-Down Approach.
Assessment of the Suggested Approach.
Evaluation of Using Economic Capital.
Summary.
CAPITAL BUDGETING IN BANKS.
Evolution of Capital-Budgeting Tools in Banks.
RAROC as a Capital-Budgeting Tool in Banks.
Definition of RAROC.
Advantages of RAROC.
Assumptions of RAROC.
Deficiencies of RAROC.
Deficiencies of the Generic RAROC Model.
Modifying RAROC to Address Its Pitfalls.
Fundamental Problems of RAROC.
Evaluation of RAROC as a Single-Factor Model for Capital Budgeting in Banks.
New Approaches to Capital Budgeting in Banks.
Overview of the New Approaches.
Evaluation of RAROC in the Light of the New Approaches.
Implications of the New Approaches to Risk Management and Value Creation in Banks.
Implications for Risk-Management Decisions.
Implications for Capital-Budgeting Decisions.
Implications for Capital-Structure Decisions.
New Approaches as Foundations for a Normative Theory of Risk Management in Banks.
Areas for Further Research.
Summary.
CONCLUSION.
References.
Index.
Tables.
Symbols.
Abbreviations.
INTRODUCTION.
FOUNDATIONS FOR DETERMINING THE LINK BETWEEN RISK MANAGEMENT AND VALUE CREATION IN BANKS.
Value Maximization in Banks.
Value Maximization as the Firm's Objective.
Valuation Framework for Banks.
Problems with the Valuation Framework for Banks.
Empirical Conundrum.
Other Stakeholders' Interests in Banks.
Risk Management in Banks.
Definition of Risk.
Definition of Risk Management.
Role and Importance of Risk and Its Management in Banks.
Link between Risk Management and Value Creation in Banks.
Goals of Risk Management in Banks.
Choice of the Goal Variable.
Choice of the Stakeholder Perspective.
Choice of the Risk Dimension.
Choice of the Risk-Management Strategy.
Ways to Conduct Risk Management in Banks.
Eliminate/Avoid.
Transfer.
Absorb/Manage.
Empirical Evidence.
Summary.
Appendix.
Part A: Bank Performance.
Part B: Systematic versus Specific Risk.
RATIONALES FOR RISK MANAGEMENT IN BANKS.
Risk Management and Value Creation in the Neoclassical Finance Theory.
The Neoclassical Finance Theory.
Corollaries from the Neoclassical Finance Theory with Regard to Risk Management.
The Risk Management Irrelevance Proposition.
Summary and Implications.
Discrepancies Between Neoclassical Theory and Practice.
Risk Management and Value Creation in the Neoinstitutional Finance Theory.
Classification of the Relaxation of the Assumptions of the Neoclassical World.
The Central Role of the Likelihood of Default.
Agency Costs as Rationale for Risk Management.
Agency Costs of Equity as a Rationale for Risk Management.
Agency Costs of Debt as a Rationale for Risk Management.
Coordination of Investment and Financing.
Transaction Costs as a Rationale for Risk Management.
The Costs of Financial Distress.
The Costs of Implementing Risk Management.
The Costs of Issuance.
The Costs of a Stable Risk Profile.
Taxes and Other Market Imperfections as Rationales for Risk Management.
Taxes.
Other Market Imperfections.
Additional Rationales for Risk Management in Banks.
Summary and Conclusions.
Appendix.
IMPLICATIONS OF THE PREVIOUS THEORETICAL DISCUSSION FOR THIS BOOK.
CAPITAL STRUCTURE IN BANKS.
The Role of Capital in Banks.
Capital as a Means for Achieving the Optimal Capital Structure.
Capital as Substitute for Risk Management to Ensure Bank Safety.
The Various Stakeholders' Interests in Bank Safety.
Available Capital.
Required Capital from an Economic Perspective.
Determining Capital Adequacy in the Economic Perspective.
Summary and Consequences.
Derivation of Economic Capital.
Types of Risk.
Economic Capital as an Adequate Risk Measure for Banks.
Ways to Determine Economic Capital for Various Risk Types in Banks (Bottom-Up).
Credit Risk.
Market Risk.
Operational Risk.
Aggregation of Economic Capital across Risk Types.
Concerns with the Suggested Bottom-Up Approach.
Suggestion of an Approach to Determine Economic Capital from the Top Down.
Theoretical Foundations.
Suggested Top-Down Approach.
Assessment of the Suggested Approach.
Evaluation of Using Economic Capital.
Summary.
CAPITAL BUDGETING IN BANKS.
Evolution of Capital-Budgeting Tools in Banks.
RAROC as a Capital-Budgeting Tool in Banks.
Definition of RAROC.
Advantages of RAROC.
Assumptions of RAROC.
Deficiencies of RAROC.
Deficiencies of the Generic RAROC Model.
Modifying RAROC to Address Its Pitfalls.
Fundamental Problems of RAROC.
Evaluation of RAROC as a Single-Factor Model for Capital Budgeting in Banks.
New Approaches to Capital Budgeting in Banks.
Overview of the New Approaches.
Evaluation of RAROC in the Light of the New Approaches.
Implications of the New Approaches to Risk Management and Value Creation in Banks.
Implications for Risk-Management Decisions.
Implications for Capital-Budgeting Decisions.
Implications for Capital-Structure Decisions.
New Approaches as Foundations for a Normative Theory of Risk Management in Banks.
Areas for Further Research.
Summary.
CONCLUSION.
References.
Index.
