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Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach (1996)
| Citations: | 240 - 7 self |
BibTeX
@MISC{Froot96riskmanagement,,
author = {Kenneth A. Froot and Jeremy C. Stein and Anthony M. Santomero},
title = {Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach},
year = {1996}
}
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Abstract
: We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions such as banks. Our model incorporates two key features: i) value-maximizing banks have a well-founded concern with risk management; and ii) not all the risks they face can be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including: the evaluation of proprietary trading operations; and the pricing of unhedgeable derivatives portfolios. I. Introduction One of the fundamental roles of banks and other financial intermediaries is to invest in illiquid financial assets--assets which, because of their information-intensive nature, cannot be frictionlessly traded in the capital markets. The standard example of such an illiquid asset is a loan to a small or medium-sized company. A m...
Keyphrases
risk management financial institution integrated approach capital budgeting capital structure policy capital market several application illiquid asset illiquid financial asset asset key feature proprietary trading operation unhedgeable derivative portfolio medium-sized company capital allocation capital structure decision well-founded concern information-intensive nature financial intermediary value-maximizing bank fundamental role standard example bank-level risk management consideration
