Modelling Economic Capital

ISBN-13: 9783030950989 / Angielski / Miękka / 2023

David Jamieson Bolder

Opis

How might one determine if a financial institution is taking risk in a balanced and productive manner? A powerful tool to address this question is economic capital, which is a model-based measure of the amount of equity that an entity must hold to satisfactorily offset its risk-generating activities. This book, with a particular focus on the credit-risk dimension, pragmatically explores real-world economic-capital methodologies and applications. It begins with the thorny practical issues surrounding the construction of an (industrial-strength) credit-risk economic-capital model, defensibly determining its parameters, and ensuring its efficient implementation. It then broadens its gaze to examine various critical applications and extensions of economic capital; these include loan pricing, the computation of loan impairments, and stress testing. Along the way, typically working from first principles, various possible modelling choices and related concepts are examined. The end result is a useful reference for students and practitioners wishing to learn more about a centrally important financial-management device.

Spis treści

Chapter 1. Introducing Economic Capital.- Part 1. Modelling Credit-Risk Economic Capital.- Chapter 2. Constructing a Practical Model.- Chapter 3. Finding Model Parameters.- Chapter 4. Implementing The Model.- Part 2. Loan Pricing.- Chapter 5. Approximating Economic Capital.- Chapter 6. Loan Pricing.- Part 3. Modelling Expected Credit Loss.- Chapter 7. Default-Probability Fundamentals.- Chapter 8. Building Stress Scenarios.- Chapter 9. Computing Loan Impairments.- Part 4. Other Practical Topics.- Chapter 10. Measuring Derivative Exposure.- Chapter 11. Seeking External Comparison.- Chapter 12. Thoughts on Stress Testing.

O autorze

David Jamieson Bolder is currently Director of Model Development and Economic Capital at the Nordic Investment Bank in Helsinki (Finland). Prior to this appointment, he was in charge of the World Bank Group’s model-risk function. Previously he held quantitative analytic roles at the Bank for International Settlements, the Bank of Canada, the World Bank Treasury, and the European Bank for Reconstruction and Development. He has authored numerous papers, articles, and chapters in books on risk-management, financial modelling, stochastic simulation, and optimization. Two other comprehensive books--on the topics of fixed-income portfolio analytics and credit-risk modelling--round out his list of publications. His 25-year career, by way of high-level summary, has focused on the application of mathematical techniques towards informing decision-making in the areas of sovereign-debt, pension-fund, portfolio-risk, and foreign-reserve management.

Blurb

How might one determine if a financial institution is taking risk in a balanced and productive manner? A powerful tool to address this question is economic capital, which is a model-based measure of the amount of equity that an entity must hold to satisfactorily offset its risk-generating activities. This book, with a particular focus on the credit-risk dimension, pragmatically explores real-world economic-capital methodologies and applications. It begins with the thorny practical issues surrounding the construction of an (industrial-strength) credit-risk economic-capital model, defensibly determining its parameters, and ensuring its efficient implementation. It then broadens its gaze to examine various critical applications and extensions of economic capital; these include loan pricing, the computation of loan impairments, and stress testing. Along the way, typically working from first principles, various possible modelling choices and related concepts are examined. The end result is a useful reference for students and practitioners wishing to learn more about a centrally important financial-management device.

While rigorous and technical, the book is also layered with judgement, common sense and honesty. This is a very welcome addition to the literature on this subject. - Lakshmi Shyam-Sunder, Chief Risk Officer, World Bank

With its solid theoretical foundation and its sensible practical suggestions, this volume is an important contribution to the risk management literature. - Phelim Boyle, Professor Emeritus, Pioneer in Quantitative Finance

Accessible, insightful, practical - a must-read for financial practitioners. - Per Nymand-Andersen, Adviser to senior management at the ECB, Lecturer at Goethe University