This book presents an integrated framework for risk measurement, capital management and value creation in banks. Moving from the measurement of the risks facing a bank, it defines criteria and rules to support a corporate policy aimed at maximizing shareholders' value.

Parts I - IV discuss different risk types (including interest rate, market, credit and operational risk) and how to assess the amount of capital they absorb by means of up-to-date, robust risk-measurement models. Part V surveys regulatory capital requirements: a special emphasis is given to the Basel II accord, discussing its economic foundations and managerial implications. Part VI presents models and techniques to calibrate the amount of economic capital at risk needed by the bank, to fine-tune its composition, to allocate it to risk-taking units, to estimate the "fair" return expected by shareholders, to monitor the value creation process. Risk Management and Shareholders' Value in Banking includes:

* Value at Risk, Monte Carlo models, Creditrisk+, Creditmetrics and much more

* formulae for risk-adjusted loan pricing and risk-adjusted performance measurement

* extensive, hands-on Excel examples are provided on the companion website www.wiley.com/go/rmsv

* a complete, up-to-date introduction to Basel II

* focus on capital allocation, Raroc, EVA, cost of capital and other value-creation metrics

Table of Contents

PART I INTEREST RATE RISK

Introduction to Part I

1 The Repricing Gap Model

2 The Duration Gap Model

3 Models Based on Cash-Flow Mapping

4 Internal Transfer Rates

PART II MARKET RISKS

Introduction to Part II

5 The Variance-Covariance Approach

6 Volatility Estimation Models

7 Simulation Models

8 Evaluating VaR Models

9 VaR Models: Summary, Applications and Limitations

PART Ill CREDIT RISK

Introduction to Part Ill

10 Credit-Scoring Models

11 Capital Market Models

12 LGD and Recovery Risk

13 Rating Systems

14 Portfolio Models

15 Some Applications of Credit Risk Measurement Models

16 Counterparty Risk on OTC Derivat ives

PART IV OPERATIONAL RISK

Introduction to Part IV

17 Operat ional Risk: Definit ion, Measurement and Management

PART V REGULATORY CAPITAL REQUIREMENTS

Introduction to Part V

18 The 1988 Capital Accord

19 The Capital Requirements for Market Risks

20 The New Basel Accord

21 Capital Requirements on Operational Risk

PART VI CAPITAL MANAGEMENT AND VALUE CREATION

Introduction to Part VI

22 Capital Management

23 Capital Allocation

24 Cost of Capital and Value Creation

About the Authors

Andrea Resti, formerly an officer at one of Italy's largest banks, has worked on Basel II issues for the Centre for European Policy Studies (Brussels). A consultant to several major banks, as well as to the Bank of Italy, he has held courses on credit risk for GARP and PRMIA.

Andrea Sironi, formerly with Chase Manhattan Bank in London, has been a visiting scholar at the Stern School of Business (NYU) and at the Federal Reserve Board of Governors (Washington). He is currently Dean for International Affairs at Bocconi University (Milan) and a member of the Fitch Academic Advisory Board.

The authors are both professors of Financial Markets and Institutions at Bocconi and have been teaching banking and finance for more than 15 years. Their publications comprise many articles in major international academic journals, as well as several risk management and banking textbooks, including a best-selling title on recovery risk.