Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach
Posted: 13 Jun 1998
Date Written: June 1995
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.
JEL Classification: G31, G32
Suggested Citation: Suggested Citation