Bank Risk Management: Theory



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.


Cash Flow Option Price Credit Risk Market Risk Return Distribution 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Black, F., and M. Scholes (1973). “The Pricing of Options and Corporate Liabilities,” J. Political Economy 81, 637–659.CrossRefGoogle Scholar
  2. Cox, J.C., S.A. Ross, and M. Rubinstein (1979). “Option Pricing: A Simplified Approach,” J. Financial Economics 7, 229–263.CrossRefGoogle Scholar
  3. Danielson, J., and C.G. de Vries (1997). “Extreme Returns, Tail Estimation, and Value-at-risk,” Working Paper, University of Iceland (
  4. Fallon, W. (1996). “Calculating Value-at-risk.” Working Paper, Columbia University ( Scholar
  5. Figlewski, S. (1997). “Forecasting Volatility,” Financial Markets, Institutions, & Instruments 6, No. 1.Google Scholar
  6. Garman, M.B. (1996). “Improving on VaR,” Risk 9, No. 5.Google Scholar
  7. Jorion, P. (1995). Big Bets Gone Bad. Academic Press, San Diego, CA.Google Scholar
  8. JP Morgan (1996). RiskMetrics™—technical document. 4th} ed.Google Scholar
  9. JP Morgan (1997). CreditMetrics™—technical document.Google Scholar
  10. Mandelbrot, B. (1963). “The Variation of Certain Speculative Prices,” J. Business 36, 394–419.CrossRefGoogle Scholar
  11. Markowitz, H. (1952). “Portfolio Selection.” J. Finance 7, 77–91.Google Scholar
  12. Merton, R.C. (1973). “Theory of Rational Option Pricing,” Bell Journal of Economics and Management Science 4, 141–183.CrossRefGoogle Scholar
  13. Merton, R.C. (1997). “An Analytical Derivation of the Cost of Deposit Insurance and Loan Guarantees: An Application of Modern Option Pricing Theory,” J. of Banking & Finance 1, 3–11.CrossRefGoogle Scholar
  14. Pritsker, M. (1996). “Evaluating Value-at-Risk Methodologies: Accuracy Versus Computational Time,” unpublished Working Paper, Board of Governors of the Federal Reserve System ( Scholar
  15. Sharpe, W. (1964). “Capital Asset Prices: A Theory of Market Equilibrium under Conditions of Risk.” J. Finance 19, 425–442.Google Scholar
  16. Vasicek, O.A. (1977). “An Equilibrium Characterization of the Term Structure.” J. Financial Economics 5, 177–188.CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media New York 1999

Authors and Affiliations

There are no affiliations available

Personalised recommendations