Assessment of Economic Capital: An Equity Market approach

Bandyopadhyay, Arindam and Saha, Asish (2008): Assessment of Economic Capital: An Equity Market approach.

Abstract

Assessment of individual bank’s need for economic capital will enable them to understand their actual solvency position for internal management of capital and evaluating the larger strategic issues like expanding or contracting its risk appetite to generate returns. This paper is an attempt to empirically demonstrate the process of estimating bank's mark to market measure of economic capital on an integrated basis. Such measure will help the bank as well as the regulator to understand the bank's solvency position on a regular basis. The top down approach followed in this paper will also assist the bank to measure Risk Adjusted Return on its entire business and examine its economic value addition on an integrated basis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Bank Solvency, Economic Capital, Integrated Risk Management
• Subjects: G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

References

Bandyopadhyay, A. (2007), "Mapping corporate drift towards default-Part1: a market based approach", Journal of Risk Finance, Vol.8, No.1, pp. 35-45.

Black, F. and Scholes, M. (1973), "The pricing of options and corporate liabilities", Journal of Political Economy, Vol. 81, No. 3, pp. 637-644.

Chan-Lau, J. A. and Jobert, A. and Kong, J. (February 2004), "An option-based approach to Bank vulnerabilities in Emerging Markets", IMF working paper no. WP/04/33.

Davydenko, S. A. (2005), "When do firms default? A study of the default boundary", mimeo, London Business School.

Merton, R. C. (1974), "On the pricing of corporate debt: the risk structure of the interest rates", Journal of Finance, Vol. 29, No. 2, pp. 449-70.

Veraart, L. (September 2005), "Asset-based estimates for default probabilities for commercial banks", Mimeo, University of Cambridge