Bank Risk Management: Theory
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Not too many years ago, the then Chairman of the U.S. House Banking Committee told me it was out of the question to require banks and savings and loans to mark their assets to market. Would anyone responsible for financial regulatory oversight have the temerity to be similarly dismissive today? I suspect the answer is yes. However, the increased attention that formal, scientific appraisal of bank risk has received since then is gratifying to most financial economists. The fact that contemporary bank-risk management employs many of the important theoretical and methodological advances in our field is a source of collective pride. My role on this program is to outline some of the theoretical underpinnings of contemporary bank-risk management. I shall begin with a discussion of why bank-risk management is needed. Then I shall provide some of the theoretical bases for bank-risk management with an emphasis on market and credit risks.
KeywordsCash Flow Option Price Credit Risk Market Risk Return Distribution
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