Hostname: page-component-78c5997874-ndw9j Total loading time: 0 Render date: 2024-11-05T14:40:53.035Z Has data issue: false hasContentIssue false
  • English
  • Français

The Impact of Capital Structure on Economic Capital and Risk Adjusted Performance

Published online by Cambridge University Press:  17 April 2015

Bruce T. Porteous  and
Pradip Tapadar
Bruce T. Porteous
Affiliation:
UK Risk Capital Development, Standard Life UK Financial Services, 30 Lothian Road, Edinburgh, EH1 2DH. Telephone: 0044-131 245 9307. E-Mail (work): [email protected] E-Mail (personal): [email protected]
Pradip Tapadar
Affiliation:
Institute of Mathematics, Statistics and Actuarial Science, Cornwallis Building, University of Kent, Canterbury, CT2 7NF. Telephone: 0044-1227 824 169. E-Mail (work): [email protected], E-Mail (personal): [email protected]
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

The impact that capital structure and capital asset allocation have on financial services firm economic capital and risk adjusted performance is considered. A stochastic modelling approach is used in conjunction with banking and insurance examples. It is demonstrated that gearing up Tier 1 capital with Tier 2 capital can be in the interests of bank Tier 1 capital providers, but may not always be so for insurance Tier 1 capital providers. It is also shown that, by allocating a bank or insurance firm’s Tier 1 and Tier 2 capital to higher yielding, more risky assets, risk adjusted performance can be enhanced. These results are particularly pertinent with the advent of the new Basel 2 and Solvency 2 risk based capital initiatives, for banks and insurers respectively.

Keywords

Asset allocationcapital gearingeconomic capitalfinancial services firms risk adjusted performancestochastic modelsTier 1 and Tier 2 capital
Type
Articles
Information
ASTIN Bulletin: The Journal of the IAA , Volume 38 , Issue 1 , May 2008 , pp. 341 - 380
Copyright
Copyright © ASTIN Bulletin 2008

References

Dev, A. (2004) Economic Capital: A Practitioner Guide. Risk Books, London.Google Scholar
Lauritzen, S. (1996) Graphical Models. Clarenden Press, Oxford.Google Scholar
Matten, C. (2000) Managing Bank Capital – Capital Allocation and Performance Measurement. Wiley.Google Scholar
Modigliani, F. and Miller, M. (1958) The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review 48, 261–297.Google Scholar
Porteous, B.T., McCulloch, L. and Tapadar, P. (2003) An Approach to Economic Capital for Financial Services Firms. Risk Magazine, April, 28–31.Google Scholar
Porteous, B.T. (2004) Economic Capital for Life Insurance With Profits Long Term Business Funds. Journal of Risk 6, 1–6.CrossRefGoogle Scholar
Porteous, B.T. (2005) The “Benefits” of Smoothing. Life and Pensions Magazine, August/September, 42–48.Google Scholar
Porteous, B.T. and Tapadar, P. (2005) Economic Capital and Financial Risk Management for Financial Services Firms and Conglomerates. Palgrave MacMillan.Google Scholar
Rajan, R.G. and Zingales, L. (1995) What Do We Know About Capital Structure? Some Evidence from International Data. Journal of Finance 50, 1421–1460.CrossRefGoogle Scholar
Willets, R.C., Gallop, A.P., Leandro, P.A., Lu, J.L.C., MacDonald, A.S., Miller, K.A., Richards, S.J., Robjohns, N., Ryan, J.P. and Waters, H.R. (2004) Longevity in the 21st Century. British Actuarial Journal 10, 685–832.CrossRefGoogle Scholar
Willets, R.C. (2004) The Cohort Effect: Insights and Explanations. British Actuarial Journal 10, 833–877.CrossRefGoogle Scholar