March 2002
Intermediate to advanced
176 pages
3h 48m
English
book
Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
by Jean Dermine, Youssef F. Bissada
Content preview from Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition
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2. Profit centre level
The ROE objective is relevant for the corporation as a whole. However, to make it operational, banks are setting corporate goals for profit centres, such as economic value added or economic profit.
Economic profit = (profit allocated) – (allocated equity × cost of equity) > 0
Three technical issues arise in the calculation:
Fund transfer price for deposits and loans: matched-maturity market rate. The bank must send the relevant signal to the managers collecting deposits or granting loans.
Equity allocation: regulatory capital vs. economic (risk-based) capital. As a manager, you will prefer to receive a low equity allocation, as your performance will look better. Banks are increasingly shifting away from the use of regulatory ...
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