Banking Firm, Equity and Value at Risk
Contemporary Economics, Vol. 6, No. 4, pp. 50-53, 2012
4 Pages Posted: 10 Jan 2013
Date Written: December 7, 2012
Abstract
The paper focuses on the interaction between the solvency probability of a banking firm and the diversification potential of its asset portfolio when determining optimal equity capital. The purpose of this paper is to incorporate value at risk (VaR) into the firm-theoretical model of a banking firm facing the risk of asset return. Given the necessity to achieve a confidence level for solvency, we demonstrate that diversification reduces the amount of equity. Notably, the VaR concept excludes a separation of equity policy and asset-liability management.
Keywords: financial markets, equity capital, banking, value at risk (VaR), diversification, risk management, asset-liability management
JEL Classification: G21, G28
Suggested Citation: Suggested Citation