Preface

If there is a lesson learnt from the on-going economic crisis, it is that financial companies play a key role in the economic life of nations. The understanding of how banks, insurance companies, and other financial institutions actually work is therefore of paramount importance, not just for scholars but also for managers, investors, regulators, and policy makers. A sound understanding of how financial companies work should be reflected in reliable methodologies in order to value them. However, how to value banks and other financial institutions is a topic that has not received due attention so far.

The most popular valuation manuals devote relatively little attention1 (or no attention at all) to the valuation frameworks that should be applied to financial companies. Academia started to look in-depth into this issue only recently. In fact, for both practitioners and academics, the problem with the valuation of financial companies is that these are inherently complex organizations. The raw materials they process are often very complex risks embedded in highly sophisticated financial contracts. In some cases, to fully understand the structure of certain assets in the bank Balance Sheet – not to mention the estimation of the technical reserves of life insurance companies – a PhD in physics or mathematics is necessary. No wonder that, as vividly emerged from some official parliamentary hearings about the financial crisis and subsequent scandals, even top managers and board ...

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