Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach

Kenneth A. Froot () and Jeremy Stein ()

No 5403, NBER Working Papers from National Bureau of Economic Research, Inc

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.

Date: 1996-01
Note: AP CF
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Related works:
Working Paper: Risk Management, Capital Budgeting and Capital Structure Policy for Financial Institutions: An Integrated Approach (1996)
Journal Article: Risk management, capital budgeting, and capital structure policy for financial institutions: an integrated approach (1998)
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