A Risk Professional's Survival Guide: Applied Best Practices in Risk Management

CHAPTER 4 Economic Capital, Risk-Adjusted Performance, and Capital Allocation

SIFIBANK’S BUSINESS PROBLEM

As described in Chapter 1, SifiBank Holding Company operates three major business lines: SifiBank, comprised of retail and commercial banking activities; SifiInvestment Bank, conducting trading, sales, and corporate finance activities; and SifiAsset Management and Brokerage. SifiBank’s annual strategic planning session is underway and the heads of the three divisions along with the rest of the Executive Committee (EC) including the Chief Risk Officer, CEO, President, and CFO, among others will be reviewing last year’s performance of the operating units to gain insight into where the company should deploy its capital for the coming year. A high level summary of how each unit performed is provided in Table 4.1.

Table 4.1 Summary Performance for SifiBank Operating Units

Business Unit	Assets($ Billions)	Net Income($ Billions)	Capital Charge($ Billions)	Return onCapital (%)
SifiBank	250	3	25.0	12.00
SifiInvestment Bank	650	25	65.0	38.46
SifiAsset Management & Brokerage	100	2	10.0	20.00

SifiBank Holding Company has a required level of capital to total assets of 10 percent. This could be either a regulatory requirement or an internally determined level of capital necessary to maintain some target rating for the company; for example, AA as might be provided by an external rating agency such as S&P. The holding company allocates its capital proportionally among ...