Risks and Bank Capital Regulation

Paper Summary:

One of the most fundamental objectives of bank management is maximizing shareholder value. To maximize shareholder value, bank managers must address the risk-return trade off inherent in many of their day-to-day financial transactions. This paper examines the different types of risk which fall into four main categories liquidity risk, interest rate risk, credit risk, and capital risk and shows how crucial they are to maximizing shareholder value. Examples from real life bank figures are used to illustrate examples.

From the Paper:

"If a financial institution does not have enough liquid assets, then it is possible that a run on customer withdrawals could not be met. A common scenario in the Great Depression of the 1930's, an inability to meet withdrawal demand can destroy the reputation of a financial institution. Carrying a disproportionately high liquidity risk has the potential to completely obliterate the good reputation of a financial institution, and ultimately result in the institution closing its doors."

More papers on Risks and Bank Capital Regulation:

• Research Proposal # 61395 : "Cross-Border Risks and Capital Allocation Decisions"
• Research Paper # 47424 : "Basel Capital Accord II"
• Research Paper # 106554 : "Basel II Banking Supervision"

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