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The Place of Risk Management in Financial Institutions

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  • George S. Oldfield
  • Anthony M. Santomero
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    Abstract

    The purpose of this paper is to address two issues. It defines the appropriate role played by institutions in the financial sector and focuses on the role of risk management in firms that use their own balance sheets to provide financial products. A key objective is to explain when risks are better transferred to the purchaser of the assets issued or created by the financial institution and when the risks of these financial products are best absorbed by the firm itself. However, once these risks are absorbed, they must be efficiently managed. So, a second part of the current analysis develops a framework for efficient and effective risk management for those risks which the firm chooses to manage within its balance sheet. The goal of this activity is to achieve the highest value added from the risk management undertaken.

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    File URL: http://fic.wharton.upenn.edu/fic/papers/95/9505.pdf
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    Bibliographic Info

    Paper provided by Wharton School Center for Financial Institutions, University of Pennsylvania in its series Center for Financial Institutions Working Papers with number 95-05.

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    Date of creation: Jan 1997
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    Handle: RePEc:wop:pennin:95-05

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Anthony M. Santomero, 1997. "Commercial Bank Risk Management: An Analysis of the Process," Center for Financial Institutions Working Papers 95-11, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
    3. Anthony Santomero, 1997. "Commercial Bank Risk Management: An Analysis of the Process," Journal of Financial Services Research, Springer, vol. 12(2), pages 83-115, October.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-82, September.
    6. Santomero, Anthony M. & Trester, Jeffrey J., 1998. "Financial innovation and bank risk taking," Journal of Economic Behavior & Organization, Elsevier, vol. 35(1), pages 25-37, March.
    7. Santomero, Anthony M, 1984. "Modeling the Banking Firm: A Survey," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 16(4), pages 576-602, November.
    8. Franklin Allen & Anthony M. Santomero, 1996. "The Theory of Financial Intermediation," Center for Financial Institutions Working Papers 96-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
    9. Gertler, Mark, 1988. "Financial Structure and Aggregate Economic Activity: An Overview," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 20(3), pages 559-88, August.
    10. Langohr, Herwig & Santomero, Anthony M, 1985. "The Extent of Equity Investment by European Banks: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(2), pages 243-52, May.
    11. Stulz, René M., 1984. "Optimal Hedging Policies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 19(02), pages 127-140, June.
    12. David F. Babbel & Anthony M. Santomero, 1997. "Risk Management by Insurers: An Analysis of the Process," Center for Financial Institutions Working Papers 96-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
    13. Gregory P. Hopper, 1996. "Value at risk: a new methodology for measuring portfolio risk," Business Review, Federal Reserve Bank of Philadelphia, issue Jul, pages 19-31.
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    Cited by:
    1. Peter F. Christoffersen & Francis X. Diebold, 1997. "How Relevant is Volatility Forecasting for Financial Risk Management?," Center for Financial Institutions Working Papers 97-45, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Allen, Franklin & Santomero, Anthony M., 1997. "The theory of financial intermediation," Journal of Banking & Finance, Elsevier, vol. 21(11-12), pages 1461-1485, December.
    3. Akhigbe, Aigbe & Martin, Anna D., 2006. "Valuation impact of Sarbanes-Oxley: Evidence from disclosure and governance within the financial services industry," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 989-1006, March.
    4. Anthony Santomero, 1997. "Commercial Bank Risk Management: An Analysis of the Process," Journal of Financial Services Research, Springer, vol. 12(2), pages 83-115, October.
    5. Akhigbe, Aigbe & Martin, Anna D., 2008. "Influence of disclosure and governance on risk of US financial services firms following Sarbanes-Oxley," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2124-2135, October.
    6. Anthony M. Santomero, 1997. "Commercial Bank Risk Management: An Analysis of the Process," Center for Financial Institutions Working Papers 95-11, Wharton School Center for Financial Institutions, University of Pennsylvania.

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