Journal of Financial Economics Vol. 47 No. 1 1998
Risk management, capital budgeting, and capital structure policy for financial institutions: An integrated approach
Abstract
We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions. 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 positions. We also compare our approach to the RAROC methodology that has been adopted by a number of banks.
- DOI
- 10.1016/s0304-405x(97)00037-8
- Volume
- 47
- Issue
- 1
- Pages
- 55-82
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref