On Economic Capital and Capital Management

By Guill, Gene D. | The RMA Journal, March 2004 | Go to article overview

On Economic Capital and Capital Management


Guill, Gene D., The RMA Journal


Capital management, as practiced in financial institutions today, was develop in the late 1970s and early 1980s--a period of deregulation, increasing competition, rapid implementation of new technologies, and globalization. It was during this time that banks lost the regulatory protections that had ensured them the lowest relative cost of funds. Without these advantages and still prohibited from entering the securities markets, banks were drawn to seek out riskier corporate customers. Suddenly, the traditional "buy and hold" model of asset accumulation that had defined the commercial banking industry for generations was put under pressure. Ever since, banks have wrestled with the rediscovery of their economics. Key to this rediscovery is understanding risk and integrating risk and return into a consistent framework (for example, risk-adjusted return on capital, or RAROC) for business decision making.

Bankers Trust is widely credited with pioneering the development and implementation of capital management practices in commercial banking. As a new employee there in the late 1980s, I wanted to learn as much as I could about the abstract, statistical concept referred to as economic capital. I contacted a respected analyst within the bank and asked what he thought about economic capital. I was surprised to hear him say, "You can't trade it .... I'm not interested in it."

His response was completely at odds with the stated strategies of the bank, the discussions I had had during my interviews, and the culture that I had perceived within the institution. Nonetheless, I had to admit that he had a point, and I was left wondering whether economic capital was merely a conceptual idea or whether it was an estimated number useful in business decision making. I soon came to realize it was both a concept (a model) used to define the bank's approach to the market and an estimated number used in decision making. Furthermore, any gap between these two applications was due solely to our ability to quantify the concept at that specific point in time.

Thus, although the measurement of economic capital was a fertile research field for financial theoreticians and statisticians, the concept and the estimates of economic capital that were readily available were used up to the highest levels of the institution.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

On Economic Capital and Capital Management
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.