Economic Capital Allocation under Liquidity Constraints x
Year: 2006
Type: preprint
Abstract: Since the capital structure afiects the performance of flnancial institutions confronted to liquidity constraints, the Economic Capital is determined by the maximisation of value. Allowing economic decisions to be characterised by a distorted probability distribution | so assessing the attitude towards risk as well as information and knowledge | the optimal surplus is expressed as a Value-at-Risk | as recommended by the Basel Committee. Thus, demanding more capital than regulatory requirements accounts for difierent expectations about risks. The optimal surplus is allocated to the lines of business of a conglomerate according to the borne risk and the type of divisional managers. Full allocation is assured and no covariances are required. Further, a mechanism is provided, which allows for the distribution of equity in a decentralised organisation.
Source: SSRN Electronic Journal
Author: Fernando Mierzejewski
Institution: KU Leuven
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2143462311