Economic Capital and Risk Management

The focus of this book is to investigate the economic capital modelling and risk management of financial institutions during and after the global crisis. This publication primarily concentrates on the significant role of liquidity and operational risks that serve as the pivot point on which the past financial crisis turned. In terms of economic capital and risk modelling, standard methodologies such as value-at-risk or stress testing, as well as relatively new methods including copula functions and coherent risk measures, are applied. All four chapters collectively serve the common purpose of helping to provide presentation of both theoretical and practical aspects of economic capital and related risk management practices. The book is targeted to practitioners, academics, bankers and economists interested in a deeper understanding of this field of research.

PREFACE

1. BANK CAPITAL REGULATION: FROM BRETTON WOODS TO BASEL (TOMÁŠ KLINGER, PETR TEPLÝ)

1.1 INTRODUCTION

1.2 THE THEORETICAL REGULATION FRAMEWORK
1.2.1 RATIONALE FOR BANKING REGULATION
1.2.2 BANKING SYSTEM'S EVOLUTION

1.3 BASEL ACCORDS
1.3.1 BANKING REGULATION BEFORE THE GLOBAL CRISIS -
1.3.2 REGULATION AFTER THE CRISIS AND BEYOND

1.4 CHAPTER SUMMARY

1.5 REFERENCES

2. ECONOMIC CAPITAL MANAGEMENT IN THEORY AND PRACTICE (PETR TEPLÝ ONDŘEJ VEJDOVEC)

2.1 INTRODUCTION

2.2 THEORETICAL BACKGROUND

2.3 EMPIRICAL ANALYSIS
2.3.1 DATA SAMPLE
2.3.2 SUMMARY STATISTICS
2.3.3 CASE STUDY: JPMORGAN CHASE & CO.
2.3.4 ECONOMIC CAPITAL VERSUS PERFORMANCE OF BANKS
2.3.5 ECONOMIC CAPITAL AND PROFITABILITY OF BANKS ---
2.3.6 KEY FINDINGS

2.4 OPTION THEORY OF MANAGERS' MORAL HAZARD
2.4.1 MORAL HAZARD
2.4.2 OPTION THEORY
2.4.3 OPTION THEORY OF MANAGERS' MORAL HAZARD

2.5 CHAPTER SUMMARY

2.6 REFERENCES

2.7 APPENDIX

3. COPULA FUNCTIONS IN THEORY AND PRACTICE (PETR TEPLÝ, MICHAL VRÁBEL)

3.1 INTRODUCTION

3.2 COPULA FUNCTIONS IN THEORY
3.2.1 BASIC TERMS
3.2.2 MEASURING DEPENDENCIES
3.2.3 PARAMETRIC COPULAS
3.2.4 SELECTING COPULAS

3.3 COPULA FUNCTION IN PRACTICE
3.3.1 DATA SAMPLE
3.3.2 LIQUIDITY RATIOS OF CEE BANKS
3.3.3 FUNDING LIQUIDITY AND MARKET CONTAGION IN THE CZECH BANKING SECTOR

3.4 CHAPTER SUMMARY

3.5 REFERENCES

3.6 APPENDIX

4. COHERENT RISK MEASURES (MICHAL LEBOVIČ, PETR TEPLÝ)

4.1 INTRODUCTION

4.2 CONCEPT OF COHERENCE

4.3 VALUE-AT-RISK
4.3.1 VALUE-AT-RISK VIEWED FROM THE COHERENCE PARADIGM
4.3.2 VALUE-AT-RISK AND OPERATIONAL RISK

4.4 REPRESENTATION OF COHERENT RISK MEASURES: EXPECTED SHORTFALL
4.4.1 COMPARING EXPECTED SHORTFALL AND VALUE-AT-RISK
4.4.2 EXPECTED SHORTFALL AND ECONOMIC CAPITAL

4.5 CRITICISM AND DISCUSSION OF COHERENCE

4.6 CHAPTER SUMMARY

4.7 REFERENCES