Book Description

The typical financial executive’s view of the value of risk management in their financial institution is based on the belief that risk management focuses on loss avoidance. This view is based on the history of risk management being control focused. However, risk management has evolved rapidly to address the more strategic issue of optimization of return on risk. This evolutions has been accompanied by statistical, mathematical and financial techniques which, when actively applied, can produce disproportionately high return on risk. Given that financial institutions will have to make significant investments in their risk management systems to comply with the regulatory capital calculation requirements of BIS II, the book shows how to leverage this investment to extract shareholder value. Key concepts illustrated and explained in detail include: Opportunity costs of capital Economic profit Risk adjusted returns on capital Economic capital measurement and their relationship to economic capital allocation Capital structuring Capital budgeting The use of risk adjusted performance information in the formulation of management strategies that seek to optimize return to shareholders are discussed in depth and illustrated by practical case studies of several leading financial institutions. Finally, practical incentive and technology challenges are addressed and pragmatic recommendations for overcoming these challenges are given. The book aims to describe these techniques, illustrate their application, and discuss their strategic value in the management of financial institutions.