Wall Street & Technology is part of the Informa Tech Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Risk Management

11:54 AM
Connect Directly
RSS
E-Mail
50%
50%

Taking a Closer Look at How Financial Services Firms use Economic Capital Numbers

Stephen Bates, director of the risk management group at the Bank of Montreal advocated looking at how firms use economic capital calculations rather than simply coming up with the numbers.

In the latest of eRisk's online conferences, measuring economic capital was the focus as Stephen Bates, director of the risk management group at the Bank of Montreal advocated looking at how firms use economic capital calculations rather than simply coming up with the numbers. Bates describes economic capital as a risk measure by converting the risk of loss into a dollar figure, allowing different types of risk such as market, credit and operational to be combined into a single measure.

Bates also defined what he calls "bottom-up" economic capital calculation as opposed to a "top-down" approach to figuring economic capital numbers. According to Bates, these bottom-up figures can be better used to change business line behavior because they draw directly from the business lines. Bates' description of good economic risk calculation covered the risk of shortfall in earnings or fall in value of financial assets over a yearlong period due to credit, market and operational losses.

Online polls conducted during the conference found that 24 percent of respondents currently have a model for capital allocation/attribution while another 21 percent plan to implement one within the next six months and another 21 percent plan to do so within the next 12 months. In another online poll, 55 percent of respondents indicated that their institutions use economic capital for performance measurement. Additionally, 51 percent use those figures for risk limits and 35 percent for risk appetite. According to the results, Bates emphasized that economic capital is becoming important for distributing capital among competing business lines.

Register for Wall Street & Technology Newsletters
Video
Inside Abel Noser's Trading Floor
Inside Abel Noser's Trading Floor
Advanced Trading takes you on an exclusive tour of Abel Noser's New York trading floor, where the agency broker known for transaction cost analysis, is customizing algorithms for the buy side, while growing its fixed income trading and transitions business.