Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments October 23, 2017 erstellt
Description:
Purpose: Basel III regulations require banks to protect themselves against strategic risk. This paper provides a comprehensive and measurable definition of this risk and proposes a framework to estimate economic capital requirements.Design/methodology/approach: The paper studies the literature and solicits expert opinion in formulating a comprehensive and measur- able definition of strategic risk. The paper postulates that the economic capital for a bank's strategic risk should be estimated using the cost of equity as the profitability threshold, rather than zero and develops a simulation-based framework to estimate economic capital.Findings: The framework closely matches the actual economic capital outlay for strategic risk from our case study of ABN AMRO. We show that a bank's strategic growth plans can fall into one of two scenarios based on risk-return characteristics. In one scenario, the required economic capital outlay will increase, and decrease in the other.Practical implications: Our framework is generalizable and makes use of widely accepted and used practices in banks, making it readily implementable in practice. It does not introduce errors resulting from model selection, parameterizations, or complex calculations.Societal implications: Society would be worse off in the absence of banking and lending services. Banks need to take risks to grow and stay competitive. The framework facilitates better strategic risk management, protecting banks from collapse, and reducing the need for taxpayer-funded bailouts.Originality/value: The paper provides a measurable and practitioner-verified definition of strategic risk, and proposes a simple framework to estimate economic capital requirements, a crucial topic given the threats and increased levels of strategic risk facing banks