Economic capital allocation under liquidity constraints
AbstractSince the capital structure affects the performance of financial institutions confronted to liquidity constraints, the Economic Capital is determined by the maximisation of value. Allowing economic decisions to be characterised by a distorted probability distribution, so assessing the attitude towards risk as well as information and knowledge, the optimal surplus is expressed as a Value-at-Risk, as recommended by the Basel Committee. Thus, demanding more capital than regulatory requirements accounts for different expectations about risks. The optimal surplus is allocated to the lines of business of a conglomerate according to the borne risk and the type of divisional managers. Full-allocation is assured and no covariances are required. Further, a mechanism is provided, which allows for the distribution of equity in a decentralised organisation.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 2414.
Date of creation: 01 Apr 2006
Date of revision:
economic capital; capital allocation; distorted probability principle; Value-at-Risk;
Find related papers by JEL classification:
- G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
- G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-03-31 (All new papers)
- NEP-BAN-2007-03-31 (Banking)
- NEP-KNM-2007-03-31 (Knowledge Management & Knowledge Economy)
- NEP-RMG-2007-03-31 (Risk Management)
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