Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach

39 Pages Posted: 12 Jul 2000 Last revised: 8 Oct 2021

See all articles by Kenneth Froot

Kenneth Froot

Harvard University Graduate School of Business; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 1996

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 positions.

Suggested Citation

Froot, Kenneth and Stein, Jeremy C., Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach (January 1996). Available at SSRN: https://ssrn.com/abstract=225464

Kenneth Froot (Contact Author)

Harvard University Graduate School of Business ( email )

Soldiers Field Road
Cumnock Hall
Boston, MA 02163
United States
6174956677 (Phone)

HOME PAGE: http://https://scholar.harvard.edu/kenfroot

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jeremy C. Stein

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-496-6455 (Phone)
617-496-7352 (Fax)

HOME PAGE: http://post.economics.harvard.edu/faculty/stein/stein.html

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
155
Abstract Views
4,018
rank
240,923
PlumX Metrics