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Economic Capital

Book Description

Managers can deploy and manage economic capital more effectively when they understand how their decisions add value to their organizations. Economic Capital: How It Works and What Every Manager Needs to Know presents new ways to define, measure, and implement management strategies by using recent examples, many from the sub-prime crisis. The authors also discuss the role of economic capital within the broader context of management responsibilities and activities as well as its relation to other risk management tools that are available to the modern risk manager.



    • Explains ways to use economic capital in balancing risk and return
    • Evaluates solutions to problems encountered in establishing an economic capital framework
    • Emphasizes intuition
    • Draws special attention to embedding risk modelling approaches within economic capital frameworks

Table of Contents

  1. Brief Table of Contents
  2. Table of Contents
  3. Copyright
  4. Acknowledgments
  5. Introduction
  6. BibliographyNotes
  7. Chapter 1. Measuring the Unexpected
    1. 1.1. What Is Economic Capital?
    2. 1.2. Expected and Unexpected Losses
    3. 1.3. Conceptual Issues with Economic Capital
    4. 1.4. Alternative Risk Measures
    5. 1.5. Conclusion
  8. BibliographyEndnotes
  9. Chapter 2. Show Me the Money
    1. 2.1. A Round-up of Stakeholders
    2. 2.2. Ensuring Continuity
    3. 2.3. Optimizing Profitability
    4. 2.4. Management and Economic Capital
    5. 2.5. The Actual Use of Economic Capital
    6. 2.6. Conclusion
  10. BibliographyEndnotes
  11. Chapter 3. You Manage What You Measure
    1. 3.1. Valuation Principles
    2. 3.2. Which Assets and Liabilities to Include in Economic Capital
    3. 3.3. Which Risks to Include in Economic Capital
    4. 3.4. Time Horizon and Expected Profits
    5. 3.5. Confidence Level and Cyclicality
    6. 3.6. Definition of Available Capital
    7. 3.7. Conclusion
  12. BibliographyEndnotes
  13. Chapter 4. Running the Numbers
    1. 4.1. General Considerations
    2. 4.2. Credit Risk
    3. 4.3. Market Risk
    4. 4.4. Operational Risk
    5. 4.5. Asset-Liability Management Risk
    6. 4.6. Business Risk
    7. 4.7. Other Risks
    8. 4.8. Aggregation of Risks
    9. 4.9. Conclusion
  14. BibliographyEndnotes
  15. Chapter 5. Facing Reality
    1. 5.1. Ensuring Continuity
    2. 5.2. Optimizing Profitability
    3. 5.3. Conclusion
  16. BibliographyEndnotes
  17. Chapter 6. Team Play
    1. 6.1. Stress Tests
    2. 6.2. Enterprise Risk Management (ERM)
    3. 6.3. Managing Economic and Regulatory Capital
    4. 6.4. Conclusion
  18. BibliographyEndnotes
  19. Chapter 7. What Is Next? The Future of Economic Capital
    1. 7.1. Consider All the Institution's Capital Objectives
    2. 7.2. Address the Pro-cyclicality of Capital Requirements
    3. 7.3. Continuously Improve Risk Measurement
    4. 7.4. Explicitly Account for Model Risks
    5. 7.5. Create Risk-sensitive Incentives
    6. 7.6. Align Regulatory Capital Further to Economic Capital
    7. 7.7. The Promise of Economic Capital
  20. BibliographyEndnotes