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This paper analyzes risk capital allocation problems. For risk capital allocation problems, the aim is to allocate the risk capital of a firm to its divisions. Risk capital allocation is of central importance in risk-based performance measurement. We consider a case in which the aggregate risk capital is determined via a coherent risk measure. The academic literature advocates an allocation rule that, in game-theoretic terms, is equivalent to using the Aumann-Shapley value as solution concept. This value is however not well-defined in case a differentiability condition is not satisfied. As an alternative, we introduce an allocation rule inspired by the Shapley value in a fuzzy setting. We take a grid on a fuzzy participation set, define paths on this grid and construct an allocation rule based on a path. Then, we define a rule as the limit of the average over these allocations, when the grid size converges to zero. We introduce this rule for a broad class of coherent risk measures. We show that if the Aumann-Shapley value is well-defined, the allocation rule coincides with it. If the Aumann-Shapley value is not defined, which is due to non-differentiability problems, the allocation rule specifies an explicit allocation. It corresponds with the Mertens value, which is originally characterized in an axiomatic way (Mertens, 1988), whereas we provide an asymptotic argument.

Submitted by Adriana Alves Rodrigues (aalves@espm.br) on 2020-10-21T16:18:52Z No. of bitstreams: 1 MARCELO PETRONI CALDAS.pdf: 2083850 bytes, checksum: bd405df91ead825e394610ac1459535f (MD5) Approved for entry into archive by Adriana Alves Rodrigues (aalves@espm.br) on 2020-10-21T16:20:41Z (GMT) No. of bitstreams: 1 MARCELO PETRONI CALDAS.pdf: 2083850 bytes, checksum: bd405df91ead825e394610ac1459535f (MD5) Approved for entry into archive by Ana Cristina Ropero (ana@espm.br) on 2020-10-21T17:57:37Z (GMT) No. of bitstreams: 1 MARCELO PETRONI CALDAS.pdf: 2083850 bytes, checksum: bd405df91ead825e394610ac1459535f (MD5) Made available in DSpace on 2020-10-21T17:59:56Z (GMT). No. of bitstreams: 1 MARCELO PETRONI CALDAS.pdf: 2083850 bytes, checksum: bd405df91ead825e394610ac1459535f (MD5) Previous issue date: 2018-04-18 This thesis approaches capital availability of Brazilian banks to face operational risks due to business or new financial crisis as saw it recently in subprime credit crunch that caused the collapsed of many banks worldwide due to flaws in risk management. This research aimed to study whether there is a relationship between regulatory changes and capital allocation for operational risk at the nine biggest financial institutions in the Brazilian market, as released by Brazilian Central Bank, and the impact in banks capital balance and lastly in the Brazilian economy considering credit availability for banking customers. The theory used is based on the literature that focuses on cross border banking rules and the regulatory push concept, organizational ecology and the pecking order theory of capital structure. The methodology adopted is phenomenology with qualitative data analysis. Preliminary conclusions show if the rule is changed, capital allocation is impacted and shareholders have to invest more money. Esta dissertação aborda a questão da fluidez e disponibilidade de capital dos bancos nacionais para fazer frente ao risco operacional que incorram em negócios e eventuais crises financeiras que possam eclodir com o passar dos anos. O trabalho examina a relação entre alteração regulatória de alocação de capital para risco operacional nas nove maiores instituições financeiras por ativos totais que atuam no mercado brasileiro e o respectivo impacto no equilíbrio de capital dos bancos objeto desse estudo e em uma última fronteira, na economia brasileira sobre a respectiva disponibilidade de crédito. O referencial teórico utilizado é fundamentado na literatura que trata de regras bancárias cross border que abordam o conceito de regulatory push ou impulso regulatório, em tradução livre, ecologia organizacional e pecking order theory ou preferência pelo tipo de fontes de financiamento. A metodologia do trabalho é a fenomenológica com abordagem qualitativa dos dados. As conclusões preliminares são de que mudanças de regra alteram tanto a alocação de capital nesses bancos quanto a eventual necessidade de novos recursos investidos por acionistas.

In order to protect stakeholders of insurance companies and financial institutions against adverse outcomes of risky businesses, regulators and senior management use capital allocation techniques. For enterprise-wide risk management, it has become important to calculate the contribution of each risk within a portfolio. For that purpose, bivariate lower and upper orthant tail value-at-risk can be used for capital allocation. In this paper, we present multivariate value-at-risk and tail-value-at-risk for d ≥ 2 , and we focus on three different methods to calculate optimal values for the contribution of each risk within the sums of random vectors to the overall portfolio, which could particularly apply to insurance and financial portfolios.

The Indonesia Economic Quarterly (IEQ) has two main aims. First, it reports on the key developments over the past three months in Indonesia’s economy, and places these in a longerterm and global context. Based on these developments, and on policy changes over the period, the IEQ regularly updates the outlook for Indonesia’s economy and social welfare. Second, the IEQ provides a more in-depth examination of selected economic and policy issues, and analysis of Indonesia’s medium-term development challenges. It is intended for a wide audience, including policymakers, business leaders, financial market participants, and the community of analysts and professionals engaged in Indonesia’s evolving economy. This paper discusses about the economic conditions of Indonesia for the year 2015. Emerging market assets rebounded in October 2015 after the sharp losses recorded in August and September, when the uncertainty about the Chinese economic slowdown and the U.S. interest rate outlook was particularly high. Despite a more favorable market sentiment, capital flows to emerging economies have remained weak and borrowing costs relatively high. In addition to tight financing conditions, Indonesia faced subdued external demand for its exports in the near term and persistently low commodity prices over the medium run. In 2015, fire in Indonesia cost nearly twice that of reconstruction following the 2004 tsunami in Aceh. Agriculture and forestry have sustained losses and damages in trillions. Sustained exposure to haze could also lead to the volcano effect, i.e., a decrease in plant productivity in the short term due to limited sun exposure and a deleterious effect on plant physiology and photosynthesis. The recurring nature of Indonesia’s fire crisis is of particular concern. Another potential step in Indonesia’s new reform process was the country’s signaling its intention to join the Trans-Pacific Partnership (TPP) agreement in the near future. Whether membership materializes or not, the agreement is likely to have a limited impact on trade, because import tariffs in member countries are already low and Indonesia has trade agreements with most of them.

This article develops a unifying framework for allocating the aggregate capital of a financial firm to its business units. The approach relies on an optimization argument, requiring that the weighted sum of measures for the deviations of the business unit's losses from their respective allocated capitals be minimized. The approach is fair insofar as it requires capital to be close to the risk that necessitates holding it. The approach is additionally very flexible in the sense that different forms of the objective function can reflect alternative definitions of corporate risk tolerance. Owing to this flexibility, the general framework reproduces several capital allocation methods that appear in the literature and allows for alternative interpretations and possible extensions.

Um dos motivos para a recente evolução da gestão de riscos em bancos internacionais é a proposta contida no Novo Acordo de Capital da Basiléia. Essa proposta busca uma maior especialização na alocação de capital em função dos riscos presentes nas atividades dos bancos, tendência que já vem sendo refletida no ambiente regulamentar local pelo Banco Central do Brasil. A gestão de riscos e a alocação de capital em seguradoras no mercado internacional encontram-se em um processo de convergência acelerada para os princípios requeridos dos bancos. O mesmo não pode ser dito no que se refere ao ambiente regulamentar para as seguradoras no Brasil, que ainda se encontra em um estágio de desenvolvimento inferior quando comparado a seu equivalente local para bancos. Neste ensaio, apresentamos as diferenças existentes entre os ambientes de requerimento regulamentar de capital para bancos e seguradoras no Brasil. Nosso objetivo é propor a unificação desses ambientes no mercado brasileiro, apresentando uma sugestão de como tal unificação deve ser conduzida. The New Basel Capital Accord is one of the main reasons behind the recent evolution of risk management in international banks. This proposal requires that capital be allocated to face the risks present in banks. This international trend is already being reflected in the Brazilian regulatory environment for banks. The regulatory environment for risk management and capital allocation for insurance companies is converging quickly to that of banks in international markets. The same is not true for the Brazilian regulatory environment for insurance companies, which is still far behind that of banks. In this article we present the main differences between the regulatory environment for capital allocation faced by banks and insurance companies in Brazil. Our main objective is to propose a unified regulatory framework to require capital in both banks and insurance companies in Brazil, showing how this convergence should be conducted.

Expected Shortfall (ES) has been widely accepted as a risk measure that is conceptually superior to Value-at-Risk (VaR). At the same time, however, it has been criticised for issues relating to backtesting. In particular, ES has been found not to be elicitable which means that backtesting for ES is less straightforward than, e.g., backtesting for VaR. Expectiles have been suggested as potentially better alternatives to both ES and VaR. In this paper, we revisit commonly accepted desirable properties of risk measures like coherence, comonotonic additivity, robustness and elicitability. We check VaR, ES and Expectiles with regard to whether or not they enjoy these properties, with particular emphasis on Expectiles. We also consider their impact on capital allocation, an important issue in risk management. We find that, despite the caveats that apply to the estimation and backtesting of ES, it can be considered a good risk measure. As a consequence, there is no sufficient evidence to justify an all-inclusive replacement of ES by Expectiles in applications. For backtesting ES, we propose an empirical approach that consists in replacing ES by a set of four quantiles, which should allow to make use of backtesting methods for VaR. Keywords: Backtesting; capital allocation; coherence; diversification; elicitability; expected shortfall; expectile; forecasts; probability integral transform (PIT); risk measure; risk management; robustness; value-at-risk, 27 pages, 1 table

As the Mongolian mortgage market grows rapidly, and the Government of Mongolia (GoM) pursues an ambitious social housing agenda, there is an urgent need for a holistic sector approach. The following three key areas require attention from policymakers: first, there is a need to better balance housing supply and demand, which requires the authorities to focus on prudent mortgage lending standards and supervision, as well as on provision of housing infrastructure and zoned land. Second, it will be important to ensure effective implementation of ongoing and planned public housing finance programs, with a focus on preventing mortgage market distortions in pricing, emphasizing robust planning and rigorous transparency and governance. Third, authorities should aim for better balance in the composition of mortgage funding, with a focus on improvement in the legal and regulatory framework for capital markets, as well as Mongolian Mortgage Corporation (MIK) governance, products and operations. The Mongolian mortgage market is exhibiting strong growth, with portfolio outstanding increasing by 190 percent to Mongolian Tughrik (MNT) 656 billion (US$482 million) between 2009 and end-2011. This represents 8 percent of 2010 gross domestic product (GDP) and 12 percent of the 2011 banking loan book. The sector is highly concentrated, with top 4 lenders accounting for 89 percent of the market, as well as spatially in and around Ulaanbaatar. Housing prices have risen sharply in the last two years, particularly in 2011, when the increase for the predominantly mortgaged market segment was over 36 percent. While mortgage lending growth rates are consistent with the overall growth of household credit, real estate prices significantly outpaced Consumer Price Index (CPI) and GDP growth in 2011. Currently non-performing loans (NPL) are very low due to the unseasoned mortgage portfolio; however, high debt-to-income (DTI) ratio levels may exacerbate future loan age-related and cyclical delinquency increases. Due in part to extreme climatic constraints, shortage of zoned and serviced land, and infrastructure bottlenecks, housing supply is severely constrained. Large-scale, publicly-funded, subsidized housing initiatives, such as the '100,000 Apartments' Program, need to be carefully planned, so that they cause minimal distortion to the broader housing finance market.

International audience; In this paper, we propose an explicit estimation of Value-at-Risk (VaR) and Expected Shortfall (ES) for linear portfolios when the risk factors change with a convex mixture of generalized Laplace distributions (M-GLD). We introduce the dynamics Delta-GLD-VaR, Delta-GLD-ES, Delta-MGLD-VaR and Delta-MGLD-ES, by using conditional correlation multivariate GARCH. The generalized Laplace distribution impose less restrictive assumptions during estimation that should improve the precision of the VaR and ES through the varying shape and fat tails of the risk factors in relation with the historical sample data. We also suggested some areas of application to measure price risk in agriculture, risk management and financial portfolio optimization.

The paper is based on a scenario workshop held on January 20, 2009, where leading financial and private sector development experts from IFC, the International Monetary Fund, and the World Bank discussed the unfolding crisis. This paper is a product of the staff of the Financial and Private Sector Development Vice Presidency of the World Bank Group. The scenarios described in this paper do not necessarily reflect the views of the World Bank Group, its Executive Directors, or the governments they represent. The scenarios described serve as the basis of a planning exercise and are not to be interpreted as forecasts or projections on the part of the World Bank Group or the authors of this paper. The purpose of this paper is to sketch scenarios taking into account the information currently at hand. In this way, scenarios can provide decision makers with alternative views of the future. Decision makers can test their strategies against the different ways in which the future might play out. Scenarios provide a framework for debate, leading to better policy making and strategies. They are especially useful in situations where major global changes are under way but there is huge uncertainty over what may happen. Staffs of the World Bank Group are providing these scenarios to help governments and organizations prepare for an uncertain future. Being well prepared and open to thinking about different outcomes is much better than continually being behind the curve and having to chase events.

This assessment finds that Argentina has made significant progress to improve its securities regulatory system within the existing legal framework. Specifically, Argentina operates a highly, even uniquely, transparent securities regulatory program. The assessment also finds that the Argentine securities regulator has dedicated professional staff, active on-site inspection programs, pro-active investigation of complaints, a road map to transition by 2012 to international accounting standards (IFRS) and plans to modernize auditing standards, the ability to assist foreign regulatory authorities to the extent of its current powers, and a commitment to use the powers it has to meet its mandate, achieve international benchmarks, and build on its practical experience to strengthen regulatory oversight. At the same time this assessment finds areas, of which the securities regulator is well aware, that need to be improved. These include that: (i) the complex structure of the market may be a source of inefficiency and an impediment to price formation and best execution; (ii) the regulator has insufficient administrative power to oversee comprehensively the regulatory performance by certain self-regulatory organizations affecting equity and private debt markets with respect to their members and to supervise, discipline and enforce its rules and the securities laws over such members directly; (iii) the ability to cooperate domestically and with foreign regulators is constrained by securities and banking secrecy law; (iv) the legal underpinning for protecting customer funds held by intermediaries needs enhancements; (iv) there are no existing market disruption contingency plans at the regulatory level; and (v) the markets offer some products that may require additional, tailored monitoring and explanation to external participants. This assessment of the International Organization of Securities Commissions (IOSCO) objective and principles of securities regulation was conducted between May 11 and May 26, 2011 in Buenos Aires, Argentina and includes references to certain post on-site improvements. The assessment included a review of the main securities laws, executive decrees, and general resolutions that relate to the mandate of the Comision Nacional de Valores (CNV) and underpin the public offer and trading of securities in Argentina.

V diplomskem delu smo predstavili upravljanje s kapitalom ter upravljanje s tveganji, s katerimi se banke največkrat srečujejo pri svojem poslovanju. Upravljanje kapitala banke zahteva zaradi mnogih funkcij, ki jih opravlja, veliko pozornost. Ker je poslovanje banke izpostavljeno raznim vrstam tveganj, je kapital poleg vira financiranja tudi vir za pokrivanje nepričakovanih izgub in je glavno sredstvo, ki banki zagotavlja zaščito proti raznim vrstam tveganj ter ji tako omogoča varno in stabilno poslovanje. Pri upravljanju kapitala je pomembna alokacija kapitala, to pa določa strategija, kot poslovna odločitev na najvišji ravni. Namen strategije pri upravljanju kapitala je, da mora upoštevati in določiti želeni donos lastnikov in izpostavljenost tveganjem. Strategija banke določa upravljanje kapitala s politikami upravljanja banke, z donosnostjo in potrebami po kapitalu, ki jih določa izpostavljenost tveganjem zaradi poslovanja. Pri tem smo na kratko predstavili tudi primer upravljanja s kapitalom v Probanki d.d. Upravljanje s tveganji je za banko nepogrešljiva bančna funkcija, saj se glede na poslovanje nenehno izpostavlja tveganjem. Banka ne sme nadomestiti slabega upravljanja s tveganji z večjim obsegom kapitala, ampak mora strmeti k izboljšanju procesov upravljanja s tveganji, kajti noben obseg kapitala ni zadosten, kadar ima banka slab proces upravljanja s tveganji. Pri tem smo ugotovili, da je pomembno, da ima banka vzpostavljen učinkovit proces upravljanja s tveganji, ker le to banki zagotavlja konkurenčno prednost. In the diploma thesis we introduced capital management and risk management that banks have to deal with on a regular basis when doing business. Managing bank capital requires special attention because of the many functions it performs. Since bank’s business operations are exposed to different risks, the capital is, in addition to financial source, also a source for covering unexpected losses and is a main means that ensures bank's protection against different types of risks and allows a stable operation. With capital management the important thing is its allocation, which in turn is determined by a strategy as a business decision on the highest level. The purpose of a bank’s strategy with capital management is that it has to consider and determine desired owners’ yield and risk exposures. The strategy of the bank defines capital management with bank managing policies, profitability and needs for capital, which are determined by risk exposures due to business operations. In doing so, we briefly introduced the example of capital management in Probanka d.d. Risk management is an indispensable banking function for a bank, since it is, with regard to business, always exposed to risks.A bank cannot replace weak risk management with a wider scope of capital, but it needs to strive towards improving the processes of risk management, as no scope of capital can be sufficient enough when a bank has a weak risk management process.In doing so, we found out that it is important for a bank to have an established effective process of risk management, as only this ensures the bank‘s competitive advantage.

Bu çalışmada, yaygın olarak kullanılan risk ölçümleri ve risk sermayesinin dağıtım metotları gözden geçirilmektedir. Tsanakas (2004) tarafından sunulan distorsiyon ölçümleriyle dinamik sermaye dağıtımı yöntemi incelendi ve yükümlülük süreçlerinin şartlı olduğu olayların sıfır ihtimali olduğundaki durumlar için, yükümlülükler arası korelasyonunun kesin olmadığı zamanda riskten kaçınmaya yardımcı olan yeni bir k-sayısı yaklaşımı önerildi. This study reviews the commonly used risk measures and allocation methodologies for risk capital. The method proposed by Tsanakas (2004) about dynamic capital allocation with distortion risk measures analyzed and for the cases when the events on which the liability processes are conditioned have zero probability, a new k-number approach is proposed which helps to behave risk-averse when correlations among liabilities are not accurate. 60

Measuring value creation by comparing the RAROC of an exposure (the return on risk capital) with a single institution-wide hurdle rate is inconsistent with the standard theory of financial valuation. We use asset pricing theory to determine the appropriate hurdle rate for such a RAROC performance measure. We find that this hurdle rate varies with the skewness of asset returns. Thus the RAROC hurdle rate should differ substantially between equity which has a right skew and debt which has a pronounced left skew and also between different qualities of debt exposure. We discuss implications for financial institution risk management and supervision.

In this paper, authors first review the literature on the relation between finance and growth. Theory provides ambiguous predictions concerning the question of whether financial development exerts a positive, causative impact on long-run economic growth. The second part of this paper reviews the literature on the historical and policy determinants of financial development. Governments play a central role in shaping the operation of financial systems and the degree to which large segments of the financial system have access to financial services. The authors discuss the relationship between financial sector policies and economic development. The remainder of the paper proceeds as follows. Sections one and two review theory and evidence on the relation between finance and growth. Section three turns to an examination of financial sector policies, and section four concludes.

Este artigo discute a metodologia proposta por Shimpi para a gestão de riscos baseada nos custos de transação e demais fricções existentes nos mercados. O artigo demonstra que a gestão de riscos é um instrumento para a redução dos custos de transação e, como tal, pode ser substituída, ou melhorada, por práticas não convencionais. O artigo é concluído com recomendações para o desenvolvimento e implementação de modelos e técnicas de gestão de riscos que considerem a fundamentação econômica apresentada. O trabalho não apresenta conclusões analíticas (dentro do paradigma positivo de pesquisa). Essa visão alternativa fornece um novo caminho para o desenvolvimento de pesquisas na área.This paper presents the methodology proposed by Shimpi for risk management practices based on transaction costs and other market frictions.The paper demonstrates that risk management is a tool for reducing transactions costs and, as such, it can be replaced or improved by non-conventional practices. We present some recommendations for the development and implementation of risk management models and techniques that consider the economic foundation presented. This paper does not present any analytical conclusions (like the ones usually found in positive-based research). This new approach provides an alternative path towards new investigations in the field.

In the present contribution we show how the optimal amount of economic capital can be derived such that it minimizes the economic cost of risk-bearing. The economic cost of risk-bearing takes into account the cost of the economic capital as well as the cost of the residual risk. In addition to the absolute problem of the determination of the amount of economic capital, we also consider the relative problem of how to establish the allocation of economic capital among subsidiaries. However, since subsidiaries are juridical entities they will also solve the problem of economic capital allocation themselves. Clearly, in an equilibrium situation the relative allocation derived by the conglomerate and the absolute allocation derived by the subsidiaries coincide. We show that the diversification benefit which is typically obtained in a conglomerate construction, creates a virtual economic capital for subsidiaries within the conglomerate. We show furthermore that the absolute allocation approach can also be applied to the problem of optimal portfolio selection, extending the well-known Markovitz approach and providing a tool for management by economic capital. ispartof: DTEW Research Report 0348 pages:1-16 status: published

This paper aims to study changes in capital allocation routines following the introduction of a new risk management system, enterprise risk management (ERM). Based on an institutional framework and empirical evidence from multiple sources in a large UK insurance company, we evaluated the extent and nature of organisational change. ERM was seen as an external driver to the change in the existing routines, which in turn led to internal changes in new capital allocation routines. The change was extreme, which signifies that existing capital allocation routines were not strong enough to deal with ERM as a key driver of change.