Economic Capital

Sustainable design is a phrase commonly used in the realms of design practice and yet the definition of the same remains quite fuzzy, thus providing the motivation for this research. The paper looks at contemporary sustainable design practices in the area of architecture design, building construction and landscape architecture. The objective is to understand what the term “sustainable design” really means as used in practice and what strategies are being employed towards the goal of sustainable development. The ...

The extent to which the money supply affects the aggregate cash balance demanded at a certain level of nominal income and interest rates is determined by the interestrate-elasticity and stability of the money demand. An actuarial approach is adopted in this paper for dealing with investors facing liquidity constraints and maintaining different expectations about risks. Under such circumstances, a level of surplus exists which maximises expected value. Moreover, when the distorted probability principle is introduced, the optimal liquidity demand is expressed as a Value at Risk and the comonotonic dependence structure determines the amount of money demanded by the economy. As a consequence, the more unstable the economy, the greater the interestrate-elasticity of the money demand. Moreover, for different parametric characterisation of risks, market parameters are expressed as the weighted average of sectorial or individual estimations, in such a way that multiple equilibria of the economy are possible.

The Wharton Financial Institutions Center The Wharton Financial Institutions Center provides a multidisciplinary research approach to the problems and opportunities facing the financial services industry in its search for competitive excellence. The Center's research focuses on the issues related to managing risk at the firm level as well as ways to improve productivity and performance. The Center fosters the development of a community of faculty, visiting scholars and Ph.D. candidates whose research interests complement and support the mission of the Center. The Center works closely with industry executives and practitioners to ensure that its research is informed by the operating realities and competitive demands facing industry participants as they pursue competitive excellence. Copies of the working papers summarized here are available from the Center. If you would like to learn more about the Center or become a member of our research community, please let us know of your interest.

Many financial institutions assess portfolio decisions using RAROC, the ratio of expected return to risk (or 'economic') capital. We use asset pricing theory to determine the appropriate hurdle rate, finding that this varies with the skewness of asset returns. We quantify this discrepancy under a range of assumptions showing that the RAROC hurdle rate differs substantially, being higher by a factor of five or more for equity which has a right skew compared to debt which has a pronounced left skew, and also between different qualities of debt exposure. We discuss implications for both financial institution risk management and supervision.

The costly, time-consuming and complicated process of Enterprise Risk Management (ERM) can be improved in many companies and made less tedious for managers by using reasonable data and templates obtained from the peer group entities. The models used to calculate Economic Capital (EC) often underestimate its value because they do not consider decision maker perception about risk, which are absorbed by the enterprise and transferred outside of the enterprise. We assumed that mangers as the decision makers have appropriate business understanding and they can provide substantial information about risk characteristics regarding all business processes. Therefore we are focused, in this paper, on collecting data from the managers across the different businesses to derive the appropriate knowledge about the risky events, importance of particular type of risks, relationship between the risk outcomes and the level of risk control in a particular industry. We conclude that the collected data h...

The Mediterranean region is characterised by a high diversity mainly due to the integration between natural (land heterogeneity) and human (stewardship) processes. Cultural landscapes are the results of such coevolutive processes. A better understanding of the mechanisms that have assured along the millennia, the maintenance of biological as well as ecological processes seems of extreme importance for our future survival. In North America, a frontier mentality persists in the cultural mindset and rich biodiversity is associated only with remote areas, reflecting a model of an empty world in which human development is completely isolated from the natural (wild) processes. This vision is in contrast with the full world vision of the Mediterranean dwellings. Plasticity, adaptation to disturbance, and the persisting of biological refugia can be considered the most relevant factors responsible for the Mediterranean dynamics. These factors are rare or impossible to find in the North America context from which the dominance of the economic capital over the natural and cultural ones is a very popular model exported worldwide. In this commentary the full world paradigm is presented as an extension of the concept of resilience and ascendancy to propose a new grammar that incorporates self-organisation of natural and human dominated systems into a process of diffuse globalisation of economics and human behaviour. #

Credit risk analysis is an important topic in the financial risk management. Due to recent financial crises and regulatory concern of Basel II, credit risk analysis has been the major focus of financial and banking industry. An accurate estimation of credit risk could be transformed into a more efficient use of economic capital. In this study, we try to use a triple-phase neural network ensemble technique to design a credit risk evaluation system to discriminate good creditors from bad ones. In this model, many diverse neural network models are first created. Then an uncorrelation maximization algorithm is used to select the appropriate ensemble members. Finally, a reliability-based method is used for neural network ensemble. For further illustration, a publicly credit dataset is used to test the effectiveness of the proposed neural ensemble model.

The credit value-at-risk model underpinning the Basel II Internal Ratings-Based approach assumes that idiosyncratic risk has been diversified away fully in the portfolio, so that economic capital depends only on systematic risk contributions. We develop a simple methodology for approximating the effect of undiversified idiosyncratic risk on VaR. The supervisory review process (Pillar 2) of the new Basel framework offers a potential venue for application of the proposed granularity adjustment (GA).

Credit risk concentration is one of the leading topics in modern finance, as the bank regulation has made increasing use of external and internal credit ratings. Concentration risk in credit portfolios comes into being through an uneven distribution of bank loans to individual borrowers (single-name concentration) or in a hierarchical dimension such as in industry and services sectors and geographical regions (sectorial concentration).To measure single-name concentration risk the literature proposes specific concentration indexes such as the Herfindahl–Hirschman index, the Gini index or more general approaches to calculate the appropriate economic capital needed to cover the risk arising from the potential default of large borrowers.However, in our opinion, the Gini index and the Herfindahl–Hirschman index can be improved taking into account methodological and theoretical issues which are explained in this paper.We propose a new index to measure single-name credit concentration risk and we prove the properties of our contribution.Furthermore, considering the guidelines of Basel II, we describe how our index works on real financial data. Finally, we compare our index with the common procedures proposed in the literature on the basis of simulated and real data.

The concept of sustainable development has evolved a long way from its initial concerns of ‘ecological sustainability’. The sustainable development agenda respectably requires an integrated strategy which embraces and incorporate ‘economic sustainability’, ‘social sustainability’ and ‘cultural sustainability’.
From a capital perspective, sustainable development can be defined as environmental protection, economic growth, cultural identity and social well-being. The latter integrates efficient use of resources that yield valuable goods and services, investments, equity, social mobility, freedom of expression, cultural diversity, spiritual values and social cohesion through participation and empowerment. Protecting and promoting ecological, economic, social and cultural capital affects the socio-economic climate of a given environment. The synergy between the four pillars is rather major approach towards sustainable development. Indeed, approaching sustainable development from this perspective argues that the fulfilment of human needs can only be reachable through, the simultaneous development and intervention of economic drivers, human and community capacity and cultural values and conservation of the earth’s natural systems.
This paper provides a comprehensive overview of current perceptive of sustainable development, and present the main proposition of the concept through identify the key capitals where each one has its influence and demands, and shows how they contribute to sustainable development theory. Criteria for weak and strong sustainability are considered, based on which capital character is a main driver for sustainability. Further, this paper also discussed the notion of widespread use of existing indicators as a sole barometer of well-being and addressed the advantages and disadvantages of adopting them in a system. It is become obvious that existing indicators designed to evaluate individual component of capitals rather than assessing a holistic conceptualisation of sustainable and therefore different measures has to be developed. The challenge is to accumulate alternative sets of indicators that capture all the essential capitals of sustainable development to provide a holistic framework to any empirical application of human activities. This paper focus on sustainable development debate through a review and synthesis of the relevant literature.

Within the sociology of education most conceptualizations of cultural capital within empirical research focus on high status cultural participation. A smaller, parallel body of work emphasizes much broader understandings of cultural capital in relation to education. The first part of this article maps different conceptions of cultural capital across the field of educational research before developing a conceptualization that stresses the micro-interactional processes through which individuals comply (or fail to comply) with the evaluative standards of schooling. The article also argues that the growth of policy initiatives that accentuate the role of parents in schooling have made the myriad workings of cultural capital in relation to education more visible. Within government policy parental involvement has become the means whereby schools can tap the cultural capital resources of parents in the drive to raise standards. Economic capital has always had a defining influence, but now it is increasingly possible to see the power of cultural capital especially in relation to the growing emphasis on parental involvement and parental choice, and programmes such as gifted and talented. The second part of the article draws on data from research projects that examine parental choice, gifted and talented programmes, and parental involvement more generally, to illustrate the many ways in which cultural capital operates to reproduce educational advantage. Most of the examples underscore the close relationship between cultural and economic capital and how they work to reinforce each other, but an example is also included to illustrate how cultural capital can operate independently of economic capital. The article concludes that the policy emphasis on parental involvement and initiatives to retain the middle classes within state schooling work to maximize the potential of the already advantaged and are exacerbating class inequalities in education.

Bourdieu sosyolojisi, birbirine z›t görünen birçok kavram ve kuram› bir araya getirme çabas›n› içerir. Var olan tüm ikiliklere elefltiri getiren Bourdieu, her kavram ve kuram›n, incelenen olgu ve olaya göre aç›klay›c›l›¤›n›n de¤iflebilece¤ini, bu yüzden hiçbir kavram ve kuram›n d›fllanamayaca¤›n›, ayn› zamanda hiçbirinin de genel geçer kabul edilemeyece¤ini ›srarla vurgular. Salt yap›ya veya salt bireye vurgu yapan çal›flmalar›n, vurgu yapmad›klar› gerçeklikleri sürekli olarak gözden kaç›rd›klar›n› belirten Bourdieu (Allan 2006 s.172-173), ikili yönünü ya yap›salc› inflac›l›k ya da inflac› yap›salc›l›k olarak belirtir. Ona göre, incelenen olay veya olgunun tüm tarihsel geri plan›n›n bilinmesi gerekir. Teorik ve tarihi altyap›n›n tek bafllar›na aç›klay›c› olmad›¤›n› öne süren Bourdieu, kurulan teorinin prati¤e dökülmesi gerekti¤ini ve prati¤i olmayan teorinin do¤rulanamaz oldu¤unu belirtir.

In this paper we use the concept of social capital to outline a distinctive approach to understanding the interplay between management control systems and the development of social connections in and between organisations. Social capital provides a comprehensive framework for examining the nature of social connections through its focus on both structural networks (bridging) and interpersonal relationships that predispose individuals towards mutually beneficial collective action (bonding). In doing so, social capital provides a means of considering how individuals react to management control systems in terms of the social ties that exist both within the organization and external to the organization. Using a case study of a non-government organization, we show how social capital is implicated in efforts to attract economic capital and cultural capital. We demonstrate how elements of a management control system can either enhance or inhibit the bonding and bridging dimensions of social capital with potential consequences on both economic and cultural capital. We highlight the mixed and sometimes contradictory effects of management control systems on social capital, and provide a powerful illustration of the role of management control systems in brokering alliances and bridging structural holes.

This paper examines identity construction and performance in Jamaican dancehall culture. It suggests that by utilizing publicly consumptive practices in the fluid space of the dancehall, the British Link-Up Crew draws on local and global factors to re-present a form of masculinity that has arisen
organically from Jamaican society. I do not argue for the homogeneity of this form of masculine identity but suggest that this highly consumptive and performative identity reflects the socio-political and economic status of particular groups of black men in Jamaican society who are denied real access
to resources and power in the formal structures in the society. These men draw on different and often symbolic strategies, including consumption, masquerade and performance, to seek and extend their identity and masculine
status.

Through popularized lyrics and exaggerated performance styles, popular dancehall culture re-presents these discourses of identity and provides a key space for the negotiation of black masculinity and identity in Jamaica within the race/class/colour and gendered structures of power that create and maintain hierarchies of personhood.

Credit risk concentration is one of the leading topics in modern finance, as the bank regulation has made increasing use of external and internal credit ratings. Concentration risk in credit portfolios comes into being through an uneven distribution of bank loans to individual borrowers (single-name concentration) or in a hierarchical dimension such as in industry and services sectors and geographical regions (sectorial concentration).

The aim of this paper is to compare two asset allocation methods for a pension scheme during the decumulation phase in the simplified portfolio selection between a risky asset following a geometric Brownian motion and a riskless asset. The two asset allocation criteria are the ruin probability of the insurance company and the optimization of the economic capital. We first

Current research on financial risk management applications of econometrics centres on the accurate assessment of individual market and credit risks with relatively little theoretical or applied econometric research on other types of risk, aggregation risk, data incompleteness and optimal risk control. We argue that consideration of the model risk arising from crude aggregation rules and inadequate data could lead to a new class of reduced form Bayesian risk assessment models. Logically, these models should be set within a common factor framework that allows proper risk aggregation methods to be developed. We explain how such a framework could also provide the essential links between risk control, risk assessments and the optimal allocation of resources.

For insurers and reinsurers, economic capital has become central to enterprise risk management and is used in financial decision-making including by-line pricing and capital allocation. The Value-at-Risk (VaR) measure is widely used for determining economic capital. In this paper we use a shareholder and total firm value maximizing model of an insurer incorporating taxes, agency costs, financial distress costs, policyholder preference for financial quality, and by-line price elasticities. We determine optimal value maximizing pricing strategies and capitalizations for an insurer under varying assumptions for a realistic model of a multi-line insurer. We evaluate the performance of VaR-based methods for allocating capital and incorporating the cost of capital into pricing insurance. We find that with imperfectly elastic policyholder demand, capitalization, and pricing are strongly influenced by policyholder sensitivity to price and preferences for financial quality. Incorporating costs of capital using VaR must be carefully implemented if it is to be consistent with value maximizing pricing strategies.

Housing regeneration in Korea has focused on improving physical deterioration and maximizing landlord profits rather than on strengthening the social capital of low-income neighborhoods. Much less attention has been given to community capital, particularly social capital. This paper examines the characteristics of low-income communities and housing regeneration projects, and sustainable low-income communities in terms of community capital. There is no doubt that housing regeneration projects have contributed to a housing stock increase. The survey evidence demonstrates that housing regeneration projects demolished the slums where low-income families are concentrated, thereby isolating and marginalizing the displaced residents. The market approach of residential redevelopment schemes can be characterized as a landlord-initiated gentrification process. Applying the concept of sustainable development to low-income communities in urban Korea requires mobilizing residents and their governments to strengthen economic capital and preserve social and cultural capital.

In order to promote financial stability, regulatory authorities pay a lot of attention in setting minimum capital levels. In addition to these requirements, financial institutions calculate their own economic capital reflecting the unexpected losses and true risk according to the specific characteristics of their portfolio. The current Basel I framework pays little or no attention to the creditworthiness of a borrower in deciding on the regulatory capital requirements. As a result, a lot of banks remove low-risk assets from their balance sheets and only retain relatively high risk assets on balance. The recently introduced Basel II framework should result in a further convergence between regulatory and economic capital. However, recent papers argue that also under Basel II, regulatory and economic capital will have different determinants. This paper first gives an overview of capital adequacy and then further describes the differences and similarities between economic and regulatory capital based on a literature review.

We contribute to the debate over the reform of the Basel Accord by developing risk-based capital requirements for mortgage loans held in portfolio by financial intermediaries. Our approach employs simulation of both economic variables that affect default incidence and conditional loss probability distributions. Results indicate that appropriate capital charges for credit risk vary substantially with loan characteristics and portfolio geographic diversification. Hence, rules that offer little risk differentiation, including the current Basel I regime and ''standardized'' approach proposed in Basel II result in significant divergence between regulatory and economic capital. These results highlight the incentive problems inherent in simplified methods of capital regulation.

The purpose of this chapter is to give a theoretical but pedagogical introduction to the advanced statistical models that are currently being developed to estimate operational risks, with many examples to illustrate their applications in the financial industry. The introductory part discusses the definitions of operational risks in finance and banking, then considers the problems surrounding data collection and the consequent impossibility of estimating the 99.9 th percentile of an annual loss distribution with even a remote degree of accuracy. Section 7.2 describes a wellknown statistical method for estimating the loss distribution parameters when the data are subjective and/or are obtained from heterogeneous sources. Section 7.3 explains why the Advanced Measurement Approaches (AMA) for estimating operational risk capital are, in fact, all rooted in the same "Loss Distribution Approach" (LDA). The only differences are in the data used to estimate parameters (scorecard vs historical loss experience) and that, under certain assumptions, an analytic formula for estimating the unexpected loss may be used in place of simulation. In section 7.4, various generalizations of this formula are deduced from different assumptions about the loss frequency and severity, and the effect of different parameter estimation methods on the capital charge is discussed. We derive a simple formula for the inclusion of insurance cover, showing that the capital charge should be reduced by a factor (1 − r)

Abordată din punct de vedere economic şi financiar, globalizarea poate fi definită drept întărirea şi lărgirea legăturilor dintre economiile naţionale pe piaţa globală a bunurilor, serviciilor şi mai ales a capitalurilor.Globalizarea a devenit un proces obiectiv, implacabil, care se desfăşoară cu o viteză adeseori ameţitoare, cuprinzând în sfera sa cvasitotalitatea statelor lumii. Sub aspect strict economic, al eficienţei alocării şi utilizării resurselor, globalizarea economică apare ca un fenomen raţional, de natură să furnizeze un volum mai mare de bunuri şi servicii cu resurse tot mai puţine.Globalizarea economică presupune, aşadar, în esenţă, globalizarea procesului de creare a producţiei interne brute ale statelor lumii.

In this paper, which is based on fieldwork carried out in Italy in 2001–02, I consider migrants as mobile actors, people who make choices about where they go and under what title, but people whose choices are limited by a range of factors including migration regimes, social networks and social and economic capital. The key questions considered relate to ‘status’

The turmoil in the capital markets in 1997 and 1998 has highlighted the need for systematic stress testing of banks' portfolios, including both their trading and lending books. We propose that underlying macroeconomic volatility is a key part of a useful conceptual framework for stress testing credit portfolios, and that credit migration matrices provide the specific linkages between underlying macroeconomic conditions and asset quality. Credit migration matrices, which characterize the expected changes in credit quality of obligors, are cardinal inputs to many applications, including portfolio risk assessment, modeling the term structure of credit risk premia, and pricing of credit derivatives. They are also an integral part of many of the credit portfolio models used by financial institutions. By separating the economy into two states or regimes, expansion and contraction, and conditioning the migration matrix on these states, we show that the loss distribution of credit portfolios can differ greatly, as can the concomitant level of economic capital to be assigned to a bank.

The aim of this paper is to contribute towards emergent debates on the 'quality' of multifunctional trajectories in rural development. The focus will be placed on the local rural community level, as it is at this level that multifunctionality is most often implemented. There has been an identified need for a new concept of multifunctionality that is conceptually and theoretically better anchored in current debates on agricultural ⁄ rural change, and for a globally applicable model that draws on existing holistic debates. The paper will suggest a conceptual framework for understanding rural community trajectories based on economic, social and environmental resilience and vulnerability of rural areas. The notion of multifunctional quality will emerge not only as a conceptual model for understanding rural pathways of change, but also as an explanatory tool and as a normative ideal for rural development. The paper builds on debates on multifunctionality extensively shaped by human geographers with the aim to extend the conceptual boundaries of the notion of multifunctionality, to further refine existing understandings of multifunctional transitions in rural communities, and to critically interrogate the components for strong multifunctionality. The paper concludes with a discussion of the complex policy implications associated with a transition from weak to strong multifunctionality. key words multifunctionality rural communities resilience social capital economic capital environmental capital

The credit value-at-risk model underpinning the Basel II Internal Ratings-Based approach assumes that idiosyncratic risk has been diversified away fully in the portfolio, so that economic capital depends only on systematic risk contributions. We develop a simple methodology for approximating the effect of undiversified idiosyncratic risk on VaR. The supervisory review process (Pillar 2) of the new Basel framework offers a potential venue for application of the proposed granularity adjustment (GA).

Economic reasoning heavily relies on an outdated accounting scheme. This article contains a proposal to reconsider the conceptualisation of the traditional notions of 'goods' and 'capital.' The point is that to account for crucial goods in the life of humans, communities, organisations, and societies, we need to go beyond the accounting for economic capital alone, and include forms of social and cultural capital. These are the capitals that generate the values that really count, i.e. social and cultural values. The issue of measurement remains acute. The argument calls furthermore for a reconsideration of the concepts of property and ownership.

This paper examines the declining levels of respect for teachers in two communities in Cape Town, South Africa. Education has been identified as a key area of reform and redress, but a critical skills shortage and under-resourced schools are hindering progress. Data from current and former teachers illustrate how the social and institutional capital of education is being replaced by a focus on economic capital, undermining the prestige of teaching as a career. These problems reflect trends elsewhere in the world and require action to prevent further shortages in education.

This article presents an analysis for the estimation of economic capital concerning operational risk in a Brazilian banking industry case making use of Markov chains, Extreme Value Theory (EVT) and Peaks Over Threshold (POT) modelling. The findings denote that some existent methods present consistent results among institutions with similar characteristics of loss data.

We examine properties of risk measures that can be considered to be in line with some 'best practice' rules in insurance, based on solvency margins. We give ample motivation that all economic aspects related to an insurance portfolio should be considered in the definition of a risk measure. As a consequence, conditions arise for comparison as well as for addition of risk measures. We demonstrate that imposing properties that are generally valid for risk measures, in all possible dependency structures, based on the difference of the risk and the solvency margin, though providing opportunities to derive nice mathematical results, violate best practice rules. We show that so-called coherent risk measures lead to problems. In particular we consider an exponential risk measure related to a discrete ruin model, depending on the initial surplus, the desired ruin probability and the risk distribution.

The paper investigates the relation between effective demand, income distribution and unemployment empirically. Its aim is to evaluate Keynesian, Kaldorian and neoclassical hypotheses about the determination of labor market variables. To do so, a vector autoregression model consisting of capital accumulation, capacity utilization, the profit share, unemployment and the growth of labor productivity is estimated. A general post-Keynesian model following the lines of Kalecki and Kaldor is presented and provides the specification for a structural VAR. The model is estimated for the USA, UK and France.

A drawback of available portfolio credit risk models is that they fail to allow for default risk dependency across loans other than through common risk factors. Thereby, these models ignore that close ties can exist between companies due to legal, financial and business relations. In this paper, we integrate the insights from theoretical models of default correlation into a commonly used model of default and portfolio credit risk by allowing for dependency between firm default risk through both common factors and industry specific errors in a duration model. An application using pooled data from two Swedish banks' business loan portfolios over the period [1996][1997][1998][1999][2000] shows that estimates of individual default risk are little affected by including industry specific errors. However, accounting for these industry effects increases VaR estimates by 50-200 percent. A traditional model with only systematic factors, although able to fit the broad trends in credit losses, cannot match these fluctuations bacuse it fails to capture credit losses in bad times, when banks are typically hit by large unexpected credit losses. The model we propose manages to follow both the trend in credit losses and produce industry driven, time-varying, fluctuations in losses around that trend. Consequently, this model will better aid banks and regulators in determining the appropriate size of economic capital requirements. Capital buffers derived from our model will be larger for periods with large "aggregate" disturbances and smaller in better times, and avoid both overcapitalization in good times and undercapitalization in bad times.

The aim of this study is to evaluate the efficiency of public transport operations undertaken in Swedish counties by the public transport authorities (PTA), taking into account the substantial differences in operating conditions between counties. The analysis will be performed using stochastic frontier analysis (SFA) with annual data from 1986 to 2009 for 26 Swedish counties. The analysis shows how the efficiency of the individual counties has changed over time. The results are used to provide a ranking (in terms of efficiency) of the Swedish public transport authorities that can provide a basis for benchmarking. It is concluded that the efficiency of the public transport providers in all counties fell during the observed time period. Defining cost efficiency as the ratio of minimum cost to observed cost, the overall (average) cost efficiency for the industry fell from 85.7% in the eighties to 60.4% for the period from 2000 to 2009. Possible explanations for the development include increased emphasis on route density as well as higher environmental and safety requirements.

In 2001/02 a number of case study communities in both metropolitan and regional urban locations in Australia were chosen as test sites to develop measures of 'community strength' on four domains: Natural Capital; Produced Economic Capital; Human Capital; and Social and Institutional Capital. Secondary data sources were used to develop indicators to measure community strength on the first three domains, using official data that is readily accessible, including census information. For the fourth domain-Social and Institutional C apital-primary data collection was undertaken through sample surveys of households. A structured approach was devised, involving developing a survey instrument using scaled items relating to four elements-formal norms; informal norms; formal structures; and informal structures-which embrace the concepts of trust, reciprocity, bonds, bridges, links and networks in the interaction of individuals with their community inherent in the notion social capital. Exploratory principal components analysis was used to identify factors that measure those aspects of social and institutional capital, with confirmatory analysis conducted using the Cronbach's Alpha. This enabled the construction of four primary scales and 15 subscales as a tool for measuring social and institutional capital. Further analysis reveals that two measures-Anomie and perceived quality of life and wellbeing-relate to certain primary scales of social capital.