Value Added Risk Management

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table2"> <tr> <td width="780"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table3"> <tr> <td align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_belmont_david_(2004).jpg" width="136" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table4"> <tr> <td colspan="3" width="0%"> <p class="book_title">Value Added Risk Management<br> <font size="3">In Financial Institutions</font></td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap2"> <area href="../main/ratings.htm" shape="rect" coords="73, 0, 164, 33"> </map> <img border="0" src="../images_title/belmon1.gif" usemap="#FPMap2" width="180" height="158"></td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="468" id="table5"> <tr> <td> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </div> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table6"> <tr> <td width="50%" valign="top"> <p align="left" class="body"><strong style="font-weight: 400">Economic capital allocation and risk-adjusted performance metrics were pioneered by Bankers Trust during the early 1980s. Over time, similar techniques have been adopted by some, but not all, major financial institutions. The techniques largely parallel the Basle Committee's regulatory capital guidelines for banks but are modified to support internal decision making. This book describes such techniques.</strong></p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="left" id="table7"> <tr> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td><td width="5"> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">The first time I looked at the book, I disliked it and set it aside. I later returned for a second look, and I am glad I did. I discovered that my first impressions were mistaken. The book is a gem. It offers the best all-round introduction to RAROC and economic capital available. Compared to Matten (<a href="../titles/matten_c_(2000).htm">2000</a>), it is more focused. Matten is quite general and never delves deeply into the formulas for calculating RAROC. Compared to Schroeck (<a href="../titles/schroeck_g_(2002).htm">2002</a>), Belmont is more practical and accessible. Read Schroeck <i>after</i> you read Belmont.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">What I don't like about Belmont—the reason I initially set it aside—is the opening three chapters. Their purpose is to motivate a need for economic capital calculations, but they fall flat. Reading somewhat like a sales proposal from a consulting firm, they blandly assert that economic capital calculations are industry "best practice"—that "best practice" firms are using this stuff as we read. There is a rebuttal of the standard argument that risk management is unnecessary if shareholders can diversify away firm-specific risk. Arguments are sloppy at points. The chapters drag on. Don't be perturbed. Skip forward to Chapter 4.</strong></p> </td> <td width="50%" valign="top" class="body" rowspan="2"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table9"> <tr> <td class="contents_expanded"> <p class="contents" style="margin-top: 9; margin-bottom: 9">1. Risk management and value creation</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">2. A rebuttal of the risk management irrelevance proposition</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">3. Who should care and why?</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">4. Optimizing return, risk, and value - The link between RAROC and economic profit</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">5. Determining capital allocations</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">6. Determining the cost of capital</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">7. Linking capital to value - capital structuring</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">8. Linking risk to return and value - setting economic capital budgets and strategies</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">9. Impact of Basel II - installing and using I.T. systems to measure regulatory and economic risk</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">10. Frameworks for economic profit and RAROC: Case studies and common errors</p> <p class="contents" style="margin-top: 9; margin-bottom: 9">11. Conclusion</td> </tr> </table> </td> </tr> </table> <p align="left" class="body"><strong style="font-weight: 400">This is where the meat of the book begins.  Chapter 4 introduces economic capital and risk-adjusted return on capital (RAROC). Chapters 5 through 8 describe how to allocate capital and calculate its cost. Chapter 9 briefly describes technology issues. Chapter 10 looks at actual economic capital implementations at three banks. Chapter 11 concludes. </strong></p> <p align="left" class="body"><strong style="font-weight: 400">All this material is detailed, practical and insightful. Useful concepts are explained: RAROC, economic profit, internal betas, surplus regulatory capital, etc. I think Chapter 5, which describes different approaches for internally allocating economic capital, is especially interesting.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">This book will appeal to a wide audience, including senior bank executives, implementers and theorists. While largely non-technical, it offers a depth of detail that other introductory treatments do not. Despite my initial misgivings, this is an excellent book. I highly recommend </strong><span style="font-weight: 400"> <strong>i</strong>t.</span></p> <p align="center" class="body"> </p> </td> </tr> <tr> <td width="50%" valign="bottom"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table10"> <tr> <td width="100%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> <div align="left"> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" bgcolor="#FFFFCC" id="table11"> <tr> <td width="100%"> <div align="center"> <center> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table12"> <tr> <td> <p class="body" style="margin-bottom: 6; margin-left:10"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="bullet" style="margin-left: 10; margin-top:5; margin-bottom:5"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_general.htm">Risk Management - General</a></p> <p class="bullet" style="margin-left: 10; margin-top:5; margin-bottom:5"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_capital_allocation.htm">Risk Management - Capital Allocation</a></p> <p class="bullet" style="margin-left: 10; margin-top:5; margin-bottom:5"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/other_functions_regulation.htm">Other Functions - Regulation</a></p> </td> </tr> </table> </center> </div> </td> </tr> </table> </div> </td> <td>  </td> </tr> </table> </div>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>