Customer Reviews

Managing Bank Capital: Capital Allocation and Performance Measurement

5 star:		(1)
4 star:		(3)
3 star:		(1)
2 star:		(0)
1 star:		(0)

 

 

Chris Matten provides a comprehensive guide to applications of RAROC and shareholder value for managing bank capital and compensating bank executives and traders. The author provides particularly good sections on how EVA, shareholder value, and other earnings based measures can be manipulated and abused. This is not the sort of book which the corporate finance shareholder value crowd would likely read, but is one which they need to read.

Mr. Matten's insightful work highlights how rigid appliction of the Basle Accords can lead to capital misallocation. He then provides insightful suggestions, with good examples, on how to better allocate bank capital by discriminating between borrowers on the basis of risk, all the while remaining within the basle guidelines. Mr. Matten points to the need for sophisticated mathematical-statistical analysis but does not dwell on the technicalities, making the book accessible to non-rocket scientists. All in all, a highly recommended book.

With all the attention paid to bank capital management, this book is helpful in describing the concepts. However, it is not quantitative enough. The step-by-step of capital allocation for a given asset class of varying risk levels is lacking. For example, how should the bank treat the sub-prime portion of its credit card or auto loans in the capital allocation? I wish it were more specific. Could Providian or Capital One have directed the capital away from high risk loans, had they followed the advice of the book?

For a comprehensive approach that brings the reader from Cooke through RAROC, this book is very good and has no competition . What basic explanations of statistics theory you need in order to follow the main 'story' is included discreetly, so advanced readers shouldn't be bothered by them. This being said, beware the errors -- they exist throughout: for the price that Wiley Press is able to get in light of the lack of competition from another good RAROC capital allocation book ($69 last year, $95 now), it hopefully has caught and corrected them. Caveat emptor.

I bought this book hoping it would quickly bring me up to speed on key concepts in Economic Capital in the financial institutions industry. This book was simple enough for a relative novice to follow, and went into enough detail that I think most people would get something out of it. I also thought the book was well organized-- each section had a summary chapter that explained what the subsequent chapters in that section would cover so you could quickly skim or deep dive on various topics. The book was a bit dated in the sections on Basel, since it was written before Basel II was completed. Overall, an excellent introduction to Economic Capital and I was happy with my purchase.