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Economic Capital Allocation Under Liquidity Constraints
Company: Katholieke Universiteit Leuven
Year Of Publication: 2006
Month Of Publication: April
Pages: 10
Download Count: 612
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Comment Num: 0
Language: EN
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Who Can Read: Free
Date: 3-2-2006
Publisher: Administrator
Summary
Since the capital structure affects the performance of ¯nancial institutions con-fronted to liquidity constraints, the Economic Capital is determined by the max-imisation of value. Allowing economic decisions to be characterised by a distortedprobability distribution so assesing the attitude towards risk as well as informationand knowledge the optimal surplus is expressed as a Value-at-Risk as recom-mended by the Basel Committee. Thus, demanding more capital than regulatoryrequirements accounts for different expectations about risks. The optimal surplusis allocated to the lines of business of a conglomerate according to the borne riskand the type of divisional managers. Full allocation is assured and no covariancesare required. Further, a mechanism is provided, which allows for the distribution ofequity in a decentralised organisation
Author(s)
Mierzejewski, Fernando Sign in to follow this author
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