Value at Risk and Bank Capital Management

1st Edition

Risk Adjusted Performances, Capital Management and Capital Allocation Decision Making

Authors: Francesco Saita
Hardcover ISBN: 9780123694669
eBook ISBN: 9780080471068
Imprint: Academic Press
Published Date: 9th February 2007
Page Count: 280
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Table of Contents



Chapter 1 Value at Risk, Capital Management and Capital Allocation

1.1. An Introduction to Value at Risk

1.2. Capital management and capital allocation. The structure of the book.

Chapter 2 What Is ¡§Capital¡¨ Management?

2.1. Regulatory Capital and the Evolution towards Basel II 2.1.1. The 1988 Basel I Accord and the 1996 Amendment 2.1.2. The Concept of Regulatory Capital

2.2. An Overview of the Basel II Capital Accord 2.2.1. Pillar 1: Minimum Capital Requirements. The Main Changes Introduced by Basel II Box 2-1. The Impact of the Basel II Accord on the Level of Minimum Regulatory Capital Requirements 2.2.2. Pillar 2: Supervisory Review Process 2.2.3. Pillar 3: Market Discipline 2.2.4. The Debate about Basel II Adoption and Implementation

2.3. Bank¡¦s Estimates of Required Capital and the Different Notions of Bank Capital 2.3.1. Book Value of Capital and the Impact of IAS/IFRS 2.3.2. Market Capitalization and the Double Perspective of Bank Managers 2.3.3. The Impact of Alternative Notions of Capital on Capital Management and Allocation

2.4. Summary

2.5. Further Readings

Chapter 3 Market Risk

3.1. The Variance-Covariance Approach 3.1.1. A Simplified Example 3.1.2. The Choice of the Relevant Random Variables 3.1.3. Mapping Exposures Box 3-1. Mapping Equity Positions Through Beta: An Example 3.1.4. VaR for a


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

Key Features

Contains concise, expert analysis of the latest technical VaR measures but without the highly mathematical component of other books Discusses practical applications of these measures in the real world of banking, focusing on effective decision making for capital management and allocation *Author is based at Bocconi University in Milan, Italy, one of the foremost institutions for banking in Europe


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.


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"This book does a great service by presenting the measurement of market risk and credit risk in one well-structured book. Aggregation methodology is also presented in detail. The inclusion of real-life examples is also a great benefit to the reader." -- Chris Matten, Partner, Financial Services Industry Practice, PricewaterhouseCoopers

About the Authors

Francesco Saita Author

Affiliations and Expertise

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.