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Asset and Liability Management: The Banker’s Guide to Value Creation and Risk Control, Second Edition by Youssef F. Bissada, Jean Dermine

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Bank solvency and the economic value of equity

Let us consider a simple balance sheet.

The bank is solvent, that is, depositors are protected, as long as the value of assets exceeds the value of deposits, or as long as the economic value (EV) of equity is positive:

Economic value = EV = value of assets – value of deposits

If the interest rate goes up, one would expect a change (Δ) in the value of assets, the value of deposits, and the economic value of equity.

Δ(economic value) = Δ(value of assets) – Δ(value of deposits)

The risk manager is therefore looking for a measure of the value at risk, that is, a simple indicator of the impact of the ...

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