Value at Risk and Bank Capital Management

solve this problem but might, at least apparently, introduce some subjectivity and discre-

tionary power that business unit managers may dislike.

Given the pros and cons of the two alternative solutions, a bank might therefore choose

either (1) to set targets in terms of absolute profi ts based on different costs of capital

applied to business unit estimated values or (2) to set targets based on allocated CaR

(possibly based on an MCaR framework rather than a BCaR one) or (3) to set targets in

a more subjective way by taking into consideration results from both (1) and (2). Given

that the process of setting targets also has to consider the real ...