Background on Economic Capital
Volatility and Capital: Measures of Risk
Conceptual Framework for Economic Capital Models and Required Inputs
Recovery Risk and Economic Capital
The Significance of Economic Capital to Financial Institutions
Economic Capital for Retail Credit Card Portfolios
Economic Capital for Counterparty Credit Risk
Economic Capital for Securitisations
Economic Capital for Market Risk
Measuring and Calculating Economic Operational Risk Capital
A Fundamental Look at Economic Capital and Risk-Based Profitability Measures
A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules
Allocating Portfolio Economic Capital to Sub-Portfolios
Spectral Capital Allocation
Evaluating Design Choices in Economic Capital Modelling: A Loss Function Approach
In December 1993, Metallgesellschaft AG revealed that a subsidiary has accumulated paper losses of nearly US$1.5 billion from a hedging programme designed to offset the risks of long-dated forward contracts it had sold. Because they were unable to meet the cashflow requirements of the hedges, the positions and programme were liquidated, resulting in the realisation of the losses and a collapse in Metallgesellschaft’s stock price.
In 1994, as market prices for mortgage-backed securities changed radically, Askin Capital Management maintained valuations at theoretical levels, substantially above trading prices. Forced liquidations revealed the disparity, spawning the phrase “Askin for mercy” and leading four funds with over US$600 million in assets to bankruptcy.
At end of September 1998, LTCM, a multibillion-dollar hedge fund, was teetering on the brink of default due to continued adverse and extreme market movements. To avoid the threat of a systemic crisis in the world financial system, the Federal Reserve orchestrated a US$3.5 billion rescue package from leading US investment and commercial banks and the unwinding of a substantial portion of the positions held.
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