Risk and preference measurement at credit institutions

Developing a risk-bearing capacity concept based on a decision-making theory using the example of selected risk categories of cooperative banks

Since the collapse of the Lehman Brothers investment bank and the resulting accelerated global financial crisis in 2008, players, such as bank supervisors, interest groups and auditing associations as well as credit institutions, have been trying to stabilize the financial system. They have been focusing on enhancing the risk-bearing capacity (RBC) of credit institutions based on a risk-bearing capacity concept. According to traditional risk-bearing capacity methods, RBC is defined as a balance between an institution’s risk coverage funds and its level of risks. Risk is considered to be an independent concept within this context. Decision makers have to answer three main questions in an RBC concept based on this method. They have to explain how much risk capital they are willing to invest, how to measure the risk and how to distribute the risk to the individual risk classes.

These questions and the resulting problems for decision making are then analyzed together and answered from the perspective of a rationally acting player. First, general basics and problems of an RBC concept are discussed and afterwards key problems for decision-making are elaborated which are to be dealt with in an RBC concept. Then the elements of an RBC concept based on a decision-making theory are developed in detail. Based on a qualitative study, first the relevant factors are specified which have to be taken into consideration when defining the risk tolerance and choosing the holding period and confidence level. Then suitable decision-making models are elaborated on this basis.

You can find a summary of the RBC concept based on a decision-making theory in Part 3. Furthermore, opportunities and limits are elaborated. Based on the influencing models and decision-making rules, an analytical approach for solving problems for decision making is supported. Besides, the risk tolerance is derived systematically and the risk appetite is made visible using the utility function. The strategic allocation decision is considered an integral part of the RBC concept. All in all, this concept allows for decisions which are made according to the decision maker’s preferences and the requirements of the banking supervision in compliance with the goal of sustainably securing the institution’s existence.
The results of this paper significantly enhance the current academic knowledge in the field of a risk-bearing capacity concept and thus create a major practical benefit. 

By Dr. Martin Polle.
2019. 224 pages, hardcover, EUR 62.-
ISBN 978-3-8314-0896-2

This publication is only available in German.

Order now