Skip to main content
main-content

Über dieses Buch

The authors present a comprehensive and timely discussion of economic capital and financial risk management for financial services firms and conglomerates. Topics covered include: the different types of risks that firms collect; risk governance issues; how stress testing can be used to measure risk; the provision of a clear and precise definition of economic capital; the different types of capital that are eligible to back regulatory capital, and; the development of models that can be used to estimate a firm's economic capital requirements. A unique feature of the book is that, for the first time, the economic capital requirements of financial services firms across the entire risk spectrum, from the short end to the long end, are considered in one book. The authors develop models to estimate the economic capital requirements of banks, asset management firms, life and non-life insurance firms, pension funds, and the financial services conglomerates that comprise these firms. Economic capital is compared to regulatory capital and regulatory capital arbitrage is discussed. The diversification benefit present in financial services conglomerates is quantified and the practical management of this diversification benefit is dealt with. The authors give new insights into capital management and performance measurement for financial services conglomerates and provide detailed descriptions of the main financial services firm regulatory capital changes that are ongoing at the time of writing. This superb and original book charts new ground in the practical application of economic capital for financial services firms and conglomerates. It is required reading for all capital allocation and risk professionals.

Inhaltsverzeichnis

Frontmatter

Chapter 1. Introduction

Abstract
Our strong conviction is that mathematical statistics is at the very heart of understanding and measuring risk. In other words, to really get a handle on how a risk might behave in future, and the consequences of this, a stochastic approach that acknowledges the range of possible future values that the risk may take is a prerequisite. In particular, this is the case for the risk’s extreme values, and the probabilities of occurrence of these values. The book by Bernstein (1998) gives an excellent introduction to risk.
Bruce T. Porteous, Pradip Tapadar

Chapter 2. Risk Types, Collection and Mitigation

Abstract
It can be argued that the main rationale for the existence of financial services firms is to collect and manage risk, in its widest possible sense. In doing this, they usually aim to both make a profit for their shareholders and to provide value adding services for their customers, specifically managing financial risks on behalf of their customers.
Bruce T. Porteous, Pradip Tapadar

Chapter 3. Risk Governance

Abstract
Before we move on to consider the hard quantitative risk management aspects of financial services firms, we first set out the softer, more qualitative, governance aspects of risk management that firms must follow as a matter of best risk management practice.
Bruce T. Porteous, Pradip Tapadar

Chapter 4. Stress Testing to Measure Risk

Abstract
As described in Chapter 3, firms are required to self assess the amount of capital that they believe is needed to cover the risks they are running. There are many ways in which this self assessment may be carried out and it will certainly vary across firms.
Bruce T. Porteous, Pradip Tapadar

Chapter 5. Economic Capital

Abstract
Economic capital is a key, perhaps the key, quantitative risk measure for financial services firms. In this chapter we define economic capital and set out its potential uses.
Bruce T. Porteous, Pradip Tapadar

Chapter 6. Types of Capital

Abstract
In this chapter we describe the role of capital and also discuss the different types of capital that are available to financial services firms to cover their regulatory capital requirements. The discussion is based on a banking model as, at least in the UK, this is the model that has recently been adopted by other types of financial services firms.
Bruce T. Porteous, Pradip Tapadar

Chapter 7. The Stochastic Model

Abstract
As stated in Chapters 4 and 5, our preferred approach in this book is to determine economic capital using a stochastic, rather than a deterministic, approach wherever possible. This chapter develops a stochastic model that is effectively the engine that generates our stochastic stresses.
Bruce T. Porteous, Pradip Tapadar

Chapter 8. Banks

Abstract
In this chapter, we consider economic capital for banking firms. Obviously, the range and type of both banking products, and the firms themselves, is enormous. For these reasons, we focus our attention on those products and firms that we consider are most interesting, of most importance and are also those for which we have some practical experience. The principles and methods that we discuss, however, are applicable to any banking product or firm, regardless of their type, or complexity.
Bruce T. Porteous, Pradip Tapadar

Chapter 9. Non Profit Life and General Insurance Firms

Abstract
In this chapter, we consider economic capital for non profit life insurance firms and general insurance firms. With profits life insurance firms and pension funds are very different and more complex than non profit life insurance and general insurance firms. We, therefore, discuss their economic capital requirements separately in Chapter 11.
Bruce T. Porteous, Pradip Tapadar

Chapter 10. Asset Management Firms

Abstract
In this chapter we give a short discussion of economic capital for asset management firms. This discussion is brief because, as we describe below, the treatment of economic capital for asset management firms is very similar to that for unit linked life insurance firms, as described previously in Section 9.3.
Bruce T. Porteous, Pradip Tapadar

Chapter 11. With Profits Life Insurance and Pension Funds

Abstract
In Chapter 9, we gave a brief introduction to what we termed non profit life insurance. We now move on to give a similar brief introduction for so called “with profits,” or participating, life insurance. The term “with profits” is used in Europe whereas “participating” is used in North America. Throughout this book we will use the term “with profits.”
Bruce T. Porteous, Pradip Tapadar

Chapter 12. Financial Services Conglomerates

Abstract
Financial services conglomerates that possess many different types of balance sheets within their group, on which they may write risk, can enjoy certain advantages over monoline firms. Perhaps for this reason, the larger financial services firms have, in recent years, been broadening their businesses. Moreover, each firm has achieved this in its own particular way, rather than by following a set formula.
Bruce T. Porteous, Pradip Tapadar

Chapter 13. Capital Management and Performance Measures

Abstract
In this chapter, we bring together the material presented in the previous chapters to describe practical approaches to capital management and risk consistent performance measurement. Obviously, individual firms will manage their capital and measure performance in different ways and according to their own philosophies. Nevertheless, at least at the broad level of principle, we believe that the approaches set out in this chapter represent or, at the very least, are similar to approaches adopted by many firms in practice.
Bruce T. Porteous, Pradip Tapadar

Chapter 14. Regulatory Change

Abstract
During the course of the writing of this book, financial services firm regulation and reporting requirements have undergone very substantial and far reaching change. Moreover, this change is not complete and is expected to continue for many years to come. In fact, it may be safe to assume that ongoing change and the continuous evolution of financial services firms’ regulation and reporting requirements may now be a fact of life and a part of business-as-usual. For example in the banking arena, Basel 3 is already being talked about even before Basel 2 has been implemented!
Bruce T. Porteous, Pradip Tapadar

Chapter 15. Summary and Conclusions

Abstract
In this book we have introduced and discussed economic capital and financial risk management for financial services firms and conglomerates. A feature of the book is that we have considered a very broad spectrum of financial services businesses, from retail banking and non life insurance at the short end of the risk duration spectrum, to with profits life insurance and pensions at the longer end. The tools and methods that we have developed are, we believe, applicable across this entire risk spectrum and are also appropriate for all types of risks that are collected by financial services firms.
Bruce T. Porteous, Pradip Tapadar

Backmatter

Weitere Informationen

Premium Partner

    Bildnachweise