Value at Risk and Bank Capital Management

CHAPTER

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1

Value at Risk, Capital Management,

and Capital Allocation

Managing risks has always been at the heart of any bank’s activity. The existence of

fi nancial intermediation is clearly linked with a bank’s advantage in evaluating the riski-

ness of potential borrowers and in building well-diversifi ed portfolios. A bank’s ability

to survive adverse economic cycles (and phases of high volatility, as far as market risk

exposure are concerned) is linked both to the quality of its risk selection and management

processes and to its capital endowment. Capital is therefore a key resource for both share-

holders and managers who are interested in a ...