Managing Bank Capital: Capital Allocation and Performance Measurement, 2nd Edition

Glossary of Terms

Asset-volatility approach Generic expression to describe the quantification of risk capital by reference to the potential loss in value of trading positions, assets etc. caused by movements in underlying risk factors. See also value-at-risk.

Back Testing Process of validating a Value-at-Risk model by comparing the number of occasions actual outcomes exceed the model parameters.

Basel Accord Agreement reached in 1988—and subsequently modified—between the banking regulatory authorities of the G10 countries on a minimum standard framework for assessing the capital adequacy of banks. The standard is generally adopted by all OECD countries.

Business risk The risk of incurring a loss through a strategic error in the selection of business or the approach taken to manage a particular business.

Capital Amount held or required to be held by a financial institution to underpin the risk of loss in value of exposures, businesses etc., so as to protect the depositors and general creditors against loss.

Capital allocation Process of assigning capital to individual transactions, portfolios, businesses etc., as a measure of the riskiness associated with those transactions etc. Allocation is usually a notional process, such as for performance measurement purposes, and does not necessarily involve actual investment of funds.

Capital employed Total investment by shareholders in the business—see economic capital.

Confidence interval Statistical measure of the probability of an event ...