Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach
Year: 1996
Type: report
Abstract: We develop a framework for analyzing the capital allocation and capital structure decisions facing financial institutions such as banks. Our model incorporates two key features: i) value-maximizing banks have a well-founded concern with risk management; and ii) not all the risks they face can be frictionlessly hedged in the capital market. This approach allows us to show how bank-level risk management considerations should factor into the pricing of those risks that cannot be easily hedged. We examine several applications, including the evaluation of proprietary trading operations, and the pricing of unhedgeable derivatives positions.
DOI: 10.3386/w5403
Authors: Kenneth Froot, Jeremy Stein
Institutions: National Bureau of Economic Research, Harvard University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W2147947585