You are previewing Managing Bank Capital: Capital Allocation and Performance Measurement, 2nd Edition.
O'Reilly logo
Managing Bank Capital: Capital Allocation and Performance Measurement, 2nd Edition

Book Description

Managing Bank Capital explains proven techniques available in the management of bank capital that will help maximize shareholder value. This second edition has been fully updated to incorporate significant developments, such as the modeling of credit risk, and includes new sections with more technical information and advanced analysis.

Table of Contents

  1. Cover Page
  2. Dedication
  3. Title Page
  4. Copyright
  5. Contents
  6. Preface
    1. NOTE
  7. Acknowledgements
  8. Introduction: Capital Allocation in Banking
    1. ENDNOTES
  9. PART ONE: The Role and Definition of Capital
    1. 1: The Role of Capital
      1. THE DEVELOPMENT OF CAPITAL STANDARDS FOR BANKS
      2. THE ROLE OF CAPITAL
      3. THE COMPOSITION OF CAPITAL
      4. HOW MUCH CAPITAL DOES A BANK REALLY NEED?
      5. CASE STUDY: CITIBANK
      6. CASE STUDY: LLOYDS BANK
      7. CASE STUDY: BANKERS TRUST
      8. THE DRIVERS OF CAPITAL LEVELS
      9. MAKING THE MOST OF YOUR CAPITAL
      10. ENDNOTES
    2. 2: Capital-Based Management Techniques
      1. WHY IS CAPITAL IMPORTANT?
      2. FOUR VIEWS OF CAPITAL
      3. REGULATORY CAPITAL AS AN INDICATOR OF BANK SOUNDNESS…
      4. … AND AS A BUSINESS CONSTRAINT
      5. CAPITAL LEVELS AND CREDIT RATINGS
      6. AVAILABLE VERSUS REQUIRED CAPITAL
      7. THE CHALLENGE OF MANAGING THE FOUR PERSPECTIVES
      8. ENDNOTES
  10. PART TWO: The Treasurer's Perspective
    1. 3: Managing the Available Capital Base
      1. MANAGING THE BANK'S CAPITAL ADEQUACY
      2. DECIDING ON THE APPROPRIATE MIX OF CAPITAL
      3. INVESTING THE CAPITAL
      4. THE CHALLENGE FOR THE TREASURER
      5. ENDNOTE
    2. 4: Capital Instruments
      1. SHAREHOLDERS' FUNDS
      2. HYBRID EQUITY INSTRUMENTS
      3. DEBT INSTRUMENTS
      4. MANAGING THE MIX
      5. DEALING WITH SURPLUS CAPITAL
      6. ENDNOTES
    3. 5: Capital Allocation versus Capital Investment
      1. THE INVESTMENT OF CAPITAL
      2. THE ALLOCATION OF CAPITAL
      3. NET VERSUS GROSS RoC
  11. PART THREE: The Regulator's Perspective
    1. 6: Regulatory Capital Requirements
      1. CAPITAL AS A BUFFER TO ABSORB RISK
      2. OVERVIEW OF THE BASEL ACCORD
      3. MANAGING REGULATORY CAPITAL RATIOS
      4. BASEL ACCORD—STRENGTHS AND WEAKNESSES
      5. POSSIBLE FUTURE DEVELOPMENTS
      6. REGULATORY CAPITAL AS A BUSINESS CONSTRAINT
      7. SUMMARY
      8. ENDNOTE
    2. 7: The Basel Accord
      1. CHRONOLOGY OF THE BASEL ACCORD AND RELATED AMENDMENTS
      2. COVERAGE
      3. ELIGIBLE CAPITAL
      4. ON-BALANCE-SHEET ASSETS
      5. OFF-BALANCE-SHEET ASSETS
      6. THE MARKET RISK COMPONENT
      7. ASSESSING THE OVERALL CAPITAL REQUIREMENT
      8. SOLO VERSUS CONSOLIDATED ACCOUNTS
      9. ENDNOTES
    3. 8: Current Problems and Future Developments: Towards an Internal-Models Based Approach?
      1. REGULATORY CAPITAL ARBITRAGE
      2. TYPES OF REGULATORY ARBITRAGE
      3. THE REGULATORY DILEMMA
      4. GOALS OF A CAPITAL ADEQUACY SYSTEM
      5. THE WAY FORWARD
      6. APPENDIX
      7. THE PROPOSED REVISED FRAMEWORK
      8. SUMMARY
      9. ENDNOTES
  12. PART FOUR: The Risk Manager's Perspective
    1. 9: Asset Volatility as a Capital Allocation Tool
      1. WHAT IS RAPM?
      2. THE RORAC AND RAROC MODELS
      3. USES OF RISK MODELS
      4. THE VALUE-AT-RISK APPROACH
      5. ADJUSTING FOR EXPECTED LOSSES
      6. RISK CLASSES AND RISK FACTORS
      7. TYPICAL BUSINESS-SPECIFIC VOLATILITY DRIVERS
      8. TWO KEY PARAMETERS: CONFIDENCE INTERVAL AND HOLDING PERIOD
      9. DEFINING THE MARKET RISK COMPONENT
      10. DEFINING THE CREDIT RISK COMPONENT
      11. DEFINING THE OPERATIONAL RISK COMPONENT
      12. ADDING IT ALL TOGETHER
      13. WILL RAPM SOLVE ALL MY PROBLEMS?
      14. APPENDIX
      15. ENDNOTES
    2. 10: Modelling Market Risk
      1. THE VALUE-AT-RISK (VAR) CONCEPT
      2. STANDARD VAR ASSUMPTIONS
      3. ASSESSING THE RISK OF A TRADING PORTFOLIO
      4. HOLDING PERIODS
      5. CURVED PRICE/VALUE PROFILES
      6. CORRELATIONS
      7. OBSERVATION PERIODS
      8. ALTERNATIVE APPROACHES TO DETERMINING THE MARKET RISK COMPONENT
      9. INTEREST RATE RISK ON THE BANKING BOOK
      10. APPENDIX
      11. ENDNOTES
    3. 11: Modelling Credit Risk
      1. FRAMEWORK FOR CREDIT RISK
      2. CALCULATING EXPECTED LOSS
      3. CALCULATING UNEXPECTED LOSS
      4. UNEXPECTED LOSS ON A PORTFOLIO BASIS
      5. BUILDING A RISK-CAPITAL MODEL
      6. MIS-PRICING OF CREDIT RISK
      7. CREDIT RATING SCALES
      8. IMPORTANCE OF DIVERSIFICATION
      9. SUMMARY
      10. APPENDIX
      11. ENDNOTES
    4. 12: Modelling Operational and Other Risks
      1. EVENT RISK
      2. BUSINESS RISK
      3. BUILDING THE RISK-CAPITAL MODEL
      4. ADJUSTING FOR EXPECTED LOSS
      5. ALLOCATING CAPITAL TO OPERATIONAL RISK
      6. ENDNOTES
  13. PART FIVE: The Shareholder's Perspective
    1. 13: Earnings-at-Risk as a Capital Allocation Tool
      1. A TOP-DOWN MODEL OF EARNINGS AT RISK
      2. EARNINGS-AT-RISK VERSUS ECONOMIC CAPITAL
      3. USING THE MODEL AS A DECISION SUPPORT TOOL
      4. ECONOMIC CAPITAL AS INSURANCE
      5. INTEGRATING EARNINGS-AT-RISK INTO THE OVERALL CAPITAL FRAMEWORK
      6. WHAT TIME PERIOD TO USE?
      7. DIVERSIFICATION
      8. LIMITATIONS OF THE EARNINGS-VOLATILITY MODEL
      9. ASSET-VOLATILITY-BASED APPROACHES VERSUS EARNINGS-VOLATILITY-BASED APPROACHES
      10. ENDNOTES
    2. 14: Modelling Earnings-at-Risk
      1. BASIC ECONOMIC-CAPITAL MODEL
      2. INTRODUCING THEOBANK INC.
      3. EARNINGS-AT-RISK FOR INDIVIDUAL BUSINESSES
      4. THE BASIC RORAC MODEL
      5. APPENDIX
      6. ENDNOTES
  14. PART SIX: An Holistic Approach to Capital Management
    1. 15: Implementing Capital Allocation Policies and Procedures
      1. ECONOMIC PROFIT AND SHAREHOLDER VALUE
      2. ESTIMATING THE COST OF CAPITAL
      3. REGULATORY CAPITAL AS A BUSINESS CONSTRAINT
      4. PRACTICAL ISSUES OF IMPLEMENTATION: BRINGING IT ALL TOGETHER
      5. ENDNOTES
    2. 16: Economic Profit and Shareholder Value
      1. ASSESSING DISCOUNT RATES
      2. DEFINITION OF CASH EARNINGS (NOPAT)
      3. DEFINITION OF CAPITAL EMPLOYED
      4. SHAREHOLDER VALUE: THE DISCOUNTED-CASH-FLOW APPROACH
      5. FREE CASH FLOW AND ECONOMIC PROFIT AS A MEASURE OF SYNTHETIC EQUITY
      6. SHARE BUY-BACKS AS AN APPLICATION OF SHAREHOLDER-VALUE TECHNIQUES
      7. SUMMARY
      8. ENDNOTES
    3. 17: Determining the Cost of Capital: A Stock Market Perspective
      1. WHAT IS A SUITABLE TARGET RoC?
      2. USING CAPM TO ASSESS THE COST OF CAPITAL
      3. THE RISK/RETURN RELATIONSHIP AS A DETERMINATE OF REQUIRED RETURNS
      4. USING THE DIVIDEND-GROWTH MODEL
      5. DIFFERENCE BETWEEN INTERNAL MEASUREMENT OF RETURN AND THE SHAREHOLDERS' PERSPECTIVE
      6. THE PRICE/BOOK RATIO
      7. ENDNOTES
    4. 18: Practical Issues in Implementation
      1. MARK-TO-MARKET VERSUS ACCRUALS ACCOUNTING
      2. FUNDS TRANSFER PRICING
      3. THE NPV TRAP: ACCOUNTING FOR THE FUTURE COST OF CAPITAL
      4. IMPORTANCE OF CALIBRATION
      5. SUMMARY
    5. 19: Conclusion
      1. CAPITAL ALLOCATION AS A PERFORMANCE MEASURE
      2. STAGES IN THE DEVELOPMENT OF A CAPITAL ALLOCATION PROCESS
      3. WHAT KINDS OF CAPITAL ALLOCATION MEASURES EXIST?
      4. SELECTION AND IMPLEMENTATION OF A CAPITAL ALLOCATION MODEL
      5. WHAT APPROACHES COULD BE USED TO LINK CAPITAL ALLOCATION WITH PERFORMANCE?
      6. MANAGING CAPITAL LIMITS
      7. A DYNAMIC CAPITAL ALLOCATION PROCESS
      8. BARRIERS TO IMPLEMENTATION
      9. SUMMARY
      10. ENDNOTES
  15. Glossary of Terms
  16. Index