By
Francesco Saita, Professor of Financial Markets and Institutions and Director of the M.Sc. in Finance at Bocconi University, Milan, Italy, where he is
also the Vice Director of Newfin Research Center on Financial Innovation.
Description
While the highly technical measurement techniques and methodologies of Value at Risk have attracted huge interest, much less attention
has been focused on how Value at Risk and the risk-adjusted performance measures such as RAROC or economic profit/EVA„· can be effectively
used to improve a bank¡¦s decision making processes. Academic books are typically concerned primarily with measurement techniques, and
devote only a small section to describing the applications, usually without discussing the problems that changing organizational processes
in banks may have on business units¡¦ behaviour. Practitioners¡¦ books are often based on a single experience, presenting the approach
that has been pursued by a single bank, but often do not adequately evaluate that approach. In actual practice, the choice of how to
use Value at Risk and risk-adjusted performance measures has no single optimal solution, but requires effective decision making that
can identify the solution that is consistent with the bank¡¦s style of management and coordination mechanisms, and often with characteristics
of individual business units as well. In this book, Francesco Saita of Bocconi University argues that even though risk measurement techniques
have greatly improved in recent years for market, credit and now also operational risk, capital management and capital allocation decisions
are far from becoming purely technical and mechanical. On one hand, decisions about capital management must consider handling different
capital constraints (e.g. regulatory vs. economic capital ) and face remarkable difficulties in providing a measure of ¡§aggregated¡¨
Value at Risk (i.e. a measure that considers the overall value at risk of the bank after diversification across risk types). On the
other hand, the aim of using capital more efficiently through capital allocation cannot be achieved only through a sort of centralized
asset allocation process, but rather by designing a Value at Risk limit system and a risk-adjusted performance measurement system that
are designed to provide the right incentives to individual business units. This connection between sophisticated and cutting edge risk
measurement techniques and practical bank decision making about capital management and capital allocation make this book unique and provide
readers with a depth of academic and theoretical expertise combined with practical and real-world understanding of bank structure, organizational
constraints, and decisionmaking processes.
Included in series
Academic Press Advanced Finance
Audience:
Primary audience: Graduate students in master's or Ph.D. programs in finance/banking; bankers and risk managers involved in capital allocation
and portfolio management.
Course titles: advanced topics in financial/banking risk management, portfolio management,
mathematics of investment, commercial bank management.
