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Pradip Tapadar - One of the best experts on this subject based on the ideXlab platform.
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Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates
2020Co-Authors: Bruce T. Porteous, Pradip TapadarAbstract:Preface. Introduction Risk Types, Collection and Mitigation Risk Governance Stress Testing to Measure Risk Economic Capital Types of Capital The Stochastic Model Economic Capital for Banks Economic Capital for Non Profit Life Insurance Firms and General Insurance Firms Economic Capital for Asset Management Firms Economic Capital for With Profits Life Insurance and Pension Funds Financial Services Conglomerates Capital Management and Performance Measurement in Practice Regulatory Change Summary and Conclusions References Appendices
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Measuring pension plan risk from an Economic Capital perspective
2019Co-Authors: Stephen Bonnar, Aniketh Pittea, Pradip TapadarAbstract:Economic Capital, the 0.5th percentile result of a stochastic projection, is the primary risk measure employed. The research examines not only the difference in Economic Capital requirements between typical plans in the three countries, but also its sensitivity to changes in asset allocation, contributions, and starting funded status.
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An Economic Capital study of the Pension Protection Fund and UK’s Defined Benefit Pension Sector
2014Co-Authors: Pradip TapadarAbstract:With the advent of formal regulatory requirements for rigorous risk-based, or Economic, Capital quantification for the financial risk management of banking and insurance sectors, regulators and policy-makers are turning their attention to the pension sector, the other integral player in the financial markets. In this paper, we analyse the impact of applying Economic Capital techniques to defined benefit pension schemes in the UK. We propose two alternative Economic Capital quantification approaches, firstly for individual defined benefit pension schemes on a stand-alone basis and then for the pension sector as a whole by quantifying Economic Capital of the UK’s Pension Protection Fund, which takes over eligible schemes with deficit, in the event of sponsor insolvency. We find that Economic Capital requirements for individual schemes are significantly high. However, we show that sharing risks through the Pension Protection Fund, reduces the aggregate Economic Capital requirement of the entire sector.
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Economic Capital for defined benefit pension schemes: An application to the UK Universities Superannuation Scheme
Journal of Pension Economics & Finance, 2012Co-Authors: Bruce T. Porteous, Pradip Tapadar, Wei YangAbstract:This article considers the amount of Economic Capital that defined benefit (DB) pension schemes potentially need to cover the risks they are running. A real open scheme, the Universities Superannuation Scheme, is modelled and used to illustrate our results and, as expected, Economic Capital requirements are large. We discuss the appropriateness of these results and what they mean for the DB pension scheme industry and their sponsors. The article is particularly pertinent following the recent European Commission Green Paper on the future of European pensions systems, its call for advice on reviewing the Institutions for Occupational Retirement Provision Directive and the introduction of the Basel 2 and Solvency 2 risk-based regulatory regimes for banking and insurance, respectively.
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Economic Capital and Financial Risk Management
2011Co-Authors: Pradip TapadarAbstract:The latest global financial crisis has highlighted the need for financial services firms to adopt comprehensive risk management techniques to identify, manage and mitigate risks promptly and efficiently. To this end, a key risk management tool is to hold sufficient Capital to back the risks a business is running. In recent times, financial services regulators have also initiated a move towards risk-based Economic Capital approach with different regulations for banks (Basel 2 and 3) and insurance firms (Solvency 2). In this paper, a generic definition of Economic Capital is proposed using a stochastic approach, which is then used to quantify Economic Capital for a Capital repayment mortgage, a lifetime mortgage, a life insurance annuity and a conglomerate operating a range of financial services. The paper highlights Economic Capital as a risk management tool that unifies Capital calculation techniques across all financial services firms and conglomerates, irrespective of their line of operation.
Dimitris N. Chorafas - One of the best experts on this subject based on the ideXlab platform.
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5 – Economic Capital defined
Economic Capital Allocation with Basel II, 2020Co-Authors: Dimitris N. ChorafasAbstract:Publisher Summary Economic Capital is a management requirement and has different viewpoints. Different viewpoints have a common background that looks at Economic Capital as a performance measure. They also pose several challenges: (1) fair value of assets and liabilities, and (2) identification of risks, correlations, weights, and effective resource allocation. The latter must satisfy a number of requirements concerned with three different approaches: shareholder's perspective, bondholder's perspective, and regulator's perspective. Economic Capital's role is to assure that even under extreme conditions the credit institution attracts counterparties, remains solvent, and stays in business. In addition to the difference that exists between regulatory Capital and Economic Capital, there is a distinction made between Economic Capital and entrepreneurial Capital. It has been a deliberate choice—in preparing an integrated view of expert opinions on Economic Capital—that this distinction should not take center stage. Economic Capital is the amount of Capital required by a financial institution to achieve its target solvency standard.
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8 – Evolving rules and procedures for Economic Capital allocation
Economic Capital Allocation with Basel II, 2020Co-Authors: Dimitris N. ChorafasAbstract:Publisher Summary This chapter presents a discussion on the practical side of Economic Capital allocation, including senior management policies and rules that promote a rational approach. Lessons learned from the first couple of years of simulations and procedural experiences in Economic Capital allocation—by means of projects undertaken by major financial institutions under Basel Committee supervision—can be condensed in seven rules. The first rule states that the guidelines for Economic Capital allocation must be established by the board, with all business units given the responsibility for calculating their own Economic Capital needs. The second rule concerns the top-down component of the iterative process, which has been outlined as the better approach. Risk management specialists, at group level, must carefully control the exposure that has been assumed as well as the risk and return estimates made by business units and product lines. The third rule states that a detailed documentation is very important because no two business units, or product lines, have the same characteristics. The fourth rule states that the process of Economic Capital allocation must be steadily developed and defined Capital requirements regularly updated as business evolves. The fifth rule states that even what is considered to be “the best possible plan” of Economic Capital allocation, it should be tested under both normal and extreme conditions. The sixth rule involves the need for feedback and for evaluation through postmortems. The seventh rule is valid for every business and it states that “in order to start, you have to start.” Where to start, is the question. The answer given by some of the early starters is retail banking, personal loans, and loans to small and medium enterprises and corporates.
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6 – Economic Capital and solvency management
Economic Capital Allocation with Basel II, 2020Co-Authors: Dimitris N. ChorafasAbstract:Publisher Summary This chapter examines the link between risk management and Economic Capital allocation. These two issues and the way in which they impact on one another dominate the senior management interest. Within the perspective of a rigorous risk management system, the models one develops and use should reflect the fact that the Economic Capital each business unit needs is the amount of money necessary to remain solvent under extreme conditions and adversity connected to the bank's operations. Solvency ratios impact upon credit rating and market standing. The facts that risk Capital that has been calculated for the unexpected losses and events toward the further-out tail of distribution can also be called “respectability Capital.” Sensitivity analysis helps to identify key solvency drivers and pinpoint potential unexpected losses that call for Economic allocation.
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Economic Capital and algorithms for stress testing unexpected losses
Stress Testing for Risk Control Under Basel II, 2020Co-Authors: Dimitris N. ChorafasAbstract:This chapter presents a research study related to the Capital policy of banks and unexpected losses (ULs). Allocation of Economic Capital is one of the recent solutions promoted by the market's watch. ULs require much more than loan-loss provisions, a staple item with expected losses (EL). Its downside is algorithm insufficiency in computing necessary Capital resources and that unreliable correlation coefficients magnify this insufficiency. Economic Capital is a financial buffer for extreme events connected with counterparty risk, as well as major market exposures due to interest rates, currency exchange, business risk, low- margin profits and other factors that may have unexpected consequences on the bank's own credit risk and rating. Good governance looks at Economic Capital as required risk Capital. The chapter illustrates the algorithms for stress testing unexpected losses. To emphasize this approach, Belgium's KBC has instituted a book: available financial resources (AFR).
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7 – Economic Capital allocation: Practical applications and theoretical background
Economic Capital Allocation with Basel II, 2020Co-Authors: Dimitris N. ChorafasAbstract:Publisher Summary This chapter discusses the practical applications of Economic Capital allocation by means of real-life examples. As banks with experience in Economic Capital allocation appreciate, funding for extreme events is not the same as allocating Capital for expected losses. Exposure connected to expected and unexpected losses varies tremendously by instrument. Derivatives add a great deal to tail risk. In contrast, American banks emphasized the point that with credit card receivables nearly everything is expected risk. Because no senior executives or business units wish to be considered risk-prone, a major challenge is that of calculating risk appetite by instrument, product line, and business unit. Many business unit executives and product-line managers tend to shy away from high Capital allocation because of the fact that if they need substantial Capital then they will be expected to present big profits or they may be considered bad managers. Whether Economic Capital allocation is top down or bottom up, there should always be a general management account (GMA) at headquarters. The mission of GMA serves well the principle which states that a credit institution should manage its assets in a way that other people are willing to buy them. This concept goes beyond value-based management because it weights-in the risks assumed by business unit and channel all the way to solvency.
Craig Ellis - One of the best experts on this subject based on the ideXlab platform.
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Bank 'ratings arbitrage': Is LGD a blind spot in Economic Capital calculations?
International Review of Financial Analysis, 2010Co-Authors: Maike Sundmacher, Craig EllisAbstract:In banking, Economic Capital is commonly referred to as the level of Capital a financial institution needs to hold in order to achieve or maintain its target external credit rating. From a risk management perspective, pricing loan assets based on Economic Capital is preferred to regulatory Capital for its ability to better capture the unique risks and cash flows associated with an exposure. Using a loan pricing model based on Economic Capital we examine the impact of ratings on loan price and show how financial institutions can engage in 'ratings arbitrage' to target higher external credit ratings without having to increase Capital levels by manipulating loss given default data. The potential implications for regulatory authorities of such arbitrage are also discussed.
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Economic Capital, loan pricing and 'ratings arbitrage'
SSRN Electronic Journal, 2008Co-Authors: Maike Sundmacher, Craig EllisAbstract:The role of Economic Capital has grown significantly in recent years. Although not a regulatory requirement, an increasing number of financial institutions use Economic Capital for such purposes as measuring and managing the performance of people, products, risk exposures, and to manage and optimise Capital levels. From a risk management perspective, pricing loans based on Economic Capital is preferred to regulatory Capital for its ability to better capture the unique risks and cash flows associated with an exposure. This paper examines the issue of Economic Capital and its use in loan pricing. Using a loan pricing model based on Economic Capital we examine the impact of ratings on loan price and show how financial institutions can engage in 'ratings arbitrage' to target higher external credit ratings without having to increase Capital levels. The potential implications for regulatory authorities of such arbitrage are also discussed.
R Kaas - One of the best experts on this subject based on the ideXlab platform.
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Economic Capital allocation derived from risk measures
The North American Actuarial Journal, 2003Co-Authors: Jan Dhaene, M.j. Goovaerts, R KaasAbstract:We examine properties of risk measures that can be considered to be in line with some “best practice” rules in insurance, based on solvency margins. We give ample motivation that all Economic aspects related to an insurance portfolio should be considered in the definition of a risk measure. As a consequence, conditions arise for comparison as well as for addition of risk measures. We demonstrate that imposing properties that are generally valid for risk measures, in all possible dependency structures, based on the difference of the risk and the solvency margin, though providing opportunities to derive nice mathematical results, violates best practice rules. We show that so-called coherent risk measures lead to problems. In particular we consider an exponential risk measure related to a discrete ruin model, depending on the initial surplus, the desired ruin probability, and the risk distribution.
Martin L Lindstrom - One of the best experts on this subject based on the ideXlab platform.
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social determinants of health a question of social or Economic Capital interaction effects of socioEconomic factors on health outcomes
Social Science & Medicine, 2012Co-Authors: Johanna Ahnquist, Sarah P Wamala, Martin L LindstromAbstract:Social structures and socioEconomic patterns are the major determinants of population health. However, very few previous studies have simultaneously analysed the “social” and the “Economic” indicators when addressing social determinants of health. We focus on the relevance of Economic and social Capital as health determinants by analysing various indicators. The aim of this paper was to analyse independent associations, and interactions, of lack of Economic Capital (Economic hardships) and social Capital (social participation, interpersonal and political/institutional trust) on various health outcomes. Data was derived from the 2009 Swedish National Survey of Public Health, based on a randomly selected representative sample of 23,153 men and 28,261 women aged 16–84 year, with a participation rate of 53.8%. Economic hardships were measured by a combined Economic hardships measure including low household income, inability to meet expenses and lacking cash reserves. Social Capital was measured by social participation, interpersonal (horizontal) trust and political (vertical/institutional trust) trust in parliament. Health outcomes included; (i) self-rated health, (i) psychological distress (GHQ-12) and (iii) musculoskeletal disorders. Results from multivariate logistic regression show that both measures of Economic Capital and low social Capital were significantly associated with poor health status, with only a few exceptions. Significant interactive effects measured as synergy index were observed between Economic hardships and all various types of social Capital. The synergy indices ranged from 1.4 to 2.3. The present study adds to the evidence that both Economic hardships and social Capital contribute to a range of different health outcomes. Furthermore, when combined they potentiate the risk of poor health.
