Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates

Bruce T.Porteous and Pradip Tapadar

PALGRAVE MACMILLAN，2006

344页

Contents
List of Figures vii
List of Tables xiii
Preface xv
Acknowledgments xviii
Disclaimer xix
List of Abbreviations xx
1 Introduction 1
1.1 Our approach to risk 1
1.2 Our approach to capital 2
1.3 Our approach to infrastructure 2
1.4 Structure of the book 3
2 Risk Types,Collection and Mitigation 5
2.1 Introduction 5
2.2 Types of risks collected 6
2.3 Risk collection 13
2.4 Risk mitigants 16
2.5 Summary 19
3 Risk Governance 21
3.1 Introduction 21
3.2 Risk identification 22
3.3 Risk management infrastructure
and processes 25
3.4 Risk measures,appetite and limits 27
3.5 Relate capital to risk 30
3.6 Reporting processes 31
3.7 Independent reviews of internal controls 32
3.8 Summary 334 Stress Testing to Measure Risk 34
4.1 Introduction 34
4.2 Deterministic stresses 34
4.3 Stochastic stresses 35
4.4 Multivariate nature of the risk variables 37
4.5 Causal nature of the multivariate dependencies 38
4.6 Mathematical tractability 39
4.7 Stress confidence level 39
4.8 Relative pros and cons 40
4.9 Summary 41
5 Economic Capital 42
5.1 Defining economic capital 42
5.2 Time horizon for determining economic capital 43
5.3 Exclusion of the capital assets backing a firm’s business 44
5.4 Expected losses versus unexpected losses 45
5.5 Uses of economic capital 45
5.6 Economic capital calculation in practice 48
5.7 Relationship of economic capital with regulatory capital requirements 49
5.8 Summary 51
6 Types of Capital 52
6.1 Introduction 52
6.2 The role of capital 52
6.3 Categorization of capital quality 53
6.4 Capital deductions and limits 55
6.5 Summary 56
7 The Stochastic Model 58
7.1 Introduction 58
7.2 Specific low dimensional stochastic models 59
7.3 The general high dimensional stochastic model 75
7.4 Specific high dimensional stochastic model 85
7.5 Other stochastic models 91
7.6 Summary 92
8 Banks 93
8.1 Introduction 93
8.2 Retail bank examples 93
8.3 Stochastic wholesale bank example 117
8.4 Summary 129
9 Non Profit Life and General Insurance Firms 131
9.1 Introduction 131
9.2 Traditional non profit life insurance 132
9.3 Unit linked life insurance 146
9.4 General/health/property and casualty insurance 152
9.5 Summary 162
10 Asset Management Firms 163
10.1 Introduction 163
10.2 Regulation of asset management firms 163
10.3 Risk and economic capital 163
10.4 Summary 164
11 With Profits Life Insurance and Pension Funds 166
11.1 Introduction 166
11.2 Stochastic with profits life insurance investment guarantee example 167
11.3 Stochastic with profits life insurance smoothing example 190
11.4 Pensions 214
11.5 Summary 218
12 Financial Services Conglomerates 220
12.1 Introduction 220
12.2 Aggregate versus bottom up approaches to economic capital 222
12.3 Bottom up approach anomalies 223
12.4 Pros and cons of the two approaches 226
12.5 Double counting of capital 227
12.6 Example of economic capital for a financial services conglomerate 228
12.7 Management of diversification benefits 234
12.8 Summary 236
13 Capital Management and Performance Measures 237
13.1 Introduction 237
13.2 Pricing 238
13.3 Performance measurement 240
13.4 Leverage 244
13.5 Allocating Tier 1 capital to match economic capital 248
13.6 Business mix optimization 254
13.7 Implementation issues 255
13.8 Regulatory capital arbitrage 258
13.9 Summary 261
14 Regulatory Change 262
14.1 Introduction 262
14.2 The UK environment 263
14.3 Banking and asset management 263
14.4 Insurance 272
14.5 Financial groups directive 284
14.6 Accounting changes 287
14.7 Summary 288
15 Summary and Conclusions 289
Appendix 290
References 316
Index 318