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Managing and Measuring Capital: For Banks and Financial Institutions

Managing and Measuring Capital: For Banks and Financial Institutions

Author: Michael K. Ong
Publisher: Risk Books
ISBN: 9781906348458
Published In: May 2012
Format: Paperback
Jurisdiction: International ? Disclaimer:
Countri(es) stated herein are used as reference only

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This book edited by industry expert Michael Ong explores how capital is measured and managed by banks and other financial institutions and how current techniques should be improved to address the issues highlighted in the recent crisis.

The first part covers the issues of capital management, allocation, risk attribution and performance determination. The second part focuses on the measurement of

capital. The book is essential for all who witnessed the devastating effects of the crisis, due fundamentally to undercapitalisation.

"...covers all key features of the post-crisis regulatory and risk-management scenario..."

Andrea Resti, Bocconi University

"...The book comes out at an opportune moment to refocus our attention to the basic concepts of economic and regulatory capital."

Ashish Dev, Managing Director, JP Morgan Chase

There are two main parts to this book. The first part is concerned with the general issues of capital management, allocation, risk attribution and performance determination. The second part focuses on the measurement of capital. The book is essential for all who witnessed the devastating effects of the crisis, due fundamentally to undercapitalisation.

The current capital regime has turned out to be seriously flawed whether it was intentional or not, and whether or not regulators played an important role in creating this crisis. The call for regulatory reform is an open-ended endeavor.

The book is made up of the following two parts, namely, Part I: Managing Capital and Part II: Measuring Capital, with several sections under each part.

Important goals of the book:

1.   Assess the role of capital in the banking and financial industry.
2.   Assess the impact of capital to risk-taking behavior in the financial industry.
3.   Determine the amount of risk capital necessary for financial institutions to remain solvent in both normal markets and stressed conditions.
4.   Discuss the role of regulatory capital requirements and current supervisory proposals to increase capital requirements from all fronts.
5.   Assess the role of economic capital in a capital management framework.
6.   Discuss the importance of liquidity management in capital management.
7.   Discuss the development and measurement of risk-based capital standards.
8.   Develop methodologies for measuring bank capital under stressed markets.
9.   Discuss the importance, as well as the shortcomings, of stress testing and scenario analysis in capital measurement and management.
10.   Provide guidance on capital and performance management: capital allocation, risk attribution and performance measurement.
11.   Provide both qualitative (i.e., management) and quantitative (i.e., measurement) guidance on topics related to capital.

This book simultaneously incorporates both management and measurement, while aiming to provide internal and regulatory guidance for methodologies, allocation and performance assessment of capital. Furthermore, it also attempts to address deficiencies in the current capital regime that are alleged to be the root causes of the current credit crisis. Essentially, this book is well timed, covering a topic of necessity.

Introduction
Michael K. Ong (The Stuart Graduate School of Business, Illinois Institute of Technology)

Part 1 - Managing Capital

1. Maximising Capital Efficiency Through Active Credit Portfolio Management
Alistair McLeod (Barclays Capital)

2. The Interplay Between Risk and Return
Bogie Ozdemir and Peter Miu (Sun Life Financial Group (BO) and DeGroote School of Business McMaster University (PM))

3. Assessing the Emerging Caveats of the New Market Risk Metrics
Peter Dobránszky (BNP Paribas and Katholieke Universiteit Leuven)

4. Fixing What’s Broken in Market Risk Capital Models
Michael Gibson (Federal Reserve Board)

5. Beware of the Tail: A Survival Guide to the Tail Risk Wilderness
Evgueni Ivantsov (HSBC)

6. Foreign Reserve Management & the Global Financial Crisis
Orhan Kandar (Central Bank of the Republic of Turkey)

7. Managing Liquidity Risk in a New Funding Environment
Peter Neu and Pascal Vogt (The Boston consulting Group)

8. Portfolio Construction and Risk Management under Non-normality
Ho Ho (MSCI Inc)

9. A Roadmap to Connect Capital, Return and Credit Risk Strategies
Danny Dieleman and Tamar Joulia-Paris (ING Bank (DD) and St Louis University (T J-P))

Part 2 - Measuring Capital

10. Economic and Regulatory Capital for Counterparty Credit Risk
Michael Pykhtin (Federal Reserve Board)

11. Bilateral Credit Valuation Adjustment with Application to Credit Default Swaps
Damiano Brigo and Agostino Capponi (King's College London (DB) and Purdue University (AC))

12. Model-based Downturn PDs for Basel III
Esa Jokivuolle and Matti Virén (Bank of Finland)

13. Capital Allocation for Credit Portfolios under Normal and Stressed Market Conditions
Dirk Tasche and Norbert Jobst (FSA, London(DT) and Lloyds Bank (NJ))

14. Designing an Effective ICAAP as an Integrated Capital Planning Tool: Managing Capital Adequacy and Procylicality
Bogie Ozdemir and Peter Miu (Sun Life Financial Group (BO) and DeGroote School of Business McMaster University (PM))

15. Addressing Procyclicality: Credit Cycles, Stress Scenarios and Portfolio Losses
Jorge Sobehart and Rodolfo Giacone (Citigroup)

16. Fully Integrated Capital Models and Economic Scenario Generation
Alexander McNeil, Gavin Kretzschmar and Axel Kirchner (Maxwell Institute for the Mathematical Sciences, Edinburgh (AM), EADA Business School Barcelona (GK) and Barrie & Hibbert Limited (AK))

17. Measuring the Performance of a Business Within a Bank
Stuart Turnbull (Bauer College of Business, University of Houston)

18. Risk-adjusted Performance Measurement under Model Risk
Francesco Saita (Bocconi University)

Dr. Michael K. Ong is currently Professor of Finance at the Stuart School of Business, Illinois Institute of Technology. He was formerly the Director of the Finance Program and the Executive Director of the Center for Financial Markets. Prior to his retirement from the financial industry, Professor Ong was Executive Vice President and Chief Risk Officer for Credit Agricole Indosuez in New York. He has enterprise-wide responsibility for all risk management functions for corporate banking, merchant banking, asset management, capital markets activities, and the brokerage division. He was a member of the Executive Committee. Before that, he was Head of Enterprise Risk Management for ABN-AMRO Bank, responsible for management information and decision support function for the Executive Committee regarding enterprise-wide market, credit, operational, and liquidity risk, as well as RAROC, ROE, and related optimization models. Prior to that, Dr. Ong was Head of Corporate Research Unit for First Chicago NBD Corporation. The unit supports the Bank in its global enterprise-wide risk management function – market and credit risk analyses and the allocation of economic capital – and oversees the quantitative research units of the trading areas. Earlier on, he served as an assistant professor of mathematics at Bowdoin College for seven years with his research specialty in mathematical physics.

He is a member of the Editorial Board of the Journal of Financial Regulation and Compliance, the Journal of Credit Risk, and the Journal of Risk Management for Financial Institutions. He was the founding editor and Editor-in-Chief of the Journal of Credit Risk, and was on the editorial board of the Journal of RISK and The RMA Journal.

He is author or editor of the following best-selling books: Internal Credit Risk Models – Capital Allocation and Performance Measurement (Risk Books,1999); Credit Ratings – Methodologies, Rationale and Default Risk (Risk Books, 2002); The Basel Handbook – A Guide for Practitioners (Risk Books, 2004); Risk Management – A Modern Perspective (Elsevier, 2006);The Basel Handbook, 2nd Ed. (Risk Books, 2007).

Dr. Ong is widely recognized in the financial industry for his work on portfolio credit risk modelling, RAROC, economic capital allocation, operational risk, enterprise risk management, his very active involvement in regulatory issues, and his thoughtful candor on issues affecting the financial industry in general.

"While being centred on capital, Ong's book goes well beyond and covers all key features of the post-crisis regulatory and risk-management scenario. With his authoritativeness in capital management issues, Michael has managed to assemble a unique team of top researchers and practitioners, providing an updated insight on most Basel-3 topics."

Andrea Resti, Bocconi University

"This is a very useful book on management of capital as well as how capital can be measured in banks and in broader financial institutions. After the financial crisis of 2007-2008, the emphasis on stress tests for capital adequacy has shifted some focus from economic capital frameworks, not only for the Fed stress tests but also for ICAAP purposes. The book comes out at an opportune moment to refocus our attention to the basic concepts of economic and regulatory capital."

Ashish Dev, Managing Director, JP Morgan Chase

"Capital management and capital efficiency is more important than ever. Capital is a scarce resource and financial institutions have to work harder than ever to get their capital basis in good shape. Michael Ong is a well-known expert and well respected author who published numerous expositions, papers and books in the field of risk management. His contribution on capital management is a milestone in risk management and should be read by all professionals who deal with capital management in their daily business."

Christian Bluhm, Dr. rer. nat., Chief Risk Officer, FMS Wertmanagement