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A Reconciliation of the Top-Down and Bottom-Up Approaches to Risk Capital Allocations: Proportional Allocations Revisited by Furman, Edward; Kye, Yisub; Su, Jianxi is a Economics, Econometrics and Finance article available to read on EtoBox.

What is A Reconciliation of the Top-Down and Bottom-Up Approaches to Risk Capital Allocations: Proportional Allocations Revisited about?

In the current reality of prudent risk management, the problem of determining aggregate risk capital in financial entities has been intensively studied. As a result, canonical methods have been developed and even embedded in regulatory accords. Though applauded by some and questioned by others, these methods provide a much desired standard benchmark for everyone. The situation is very different when the aggregate risk capital needs to be allocated to the business units (BUs) of a financial entity. That is, there are overwhelmingly many ways to conduct the allocation exercise, and there is arguably no standard method to do so on the horizon. Two overarching approaches to allocate the aggregate risk capital stand out. These are the top-down allocation (TDA) approach that entails that the allocation exercise be imposed by the corporate center, and the bottom-up allocation (BUA) approach that implies that the allocation of the aggregate risk to BUs is informed by these units. Briefly, the TDA starts with the aggregate risk capital that is then replenished among the BUs according to the views of the center, thus limiting the inputs from the BUs. The BUA does start with the BUs but it is

Who reads A Reconciliation of the Top-Down and Bottom-Up Approaches to Risk Capital Allocations: Proportional Allocations Revisited?

Author

Furman, Edward; Kye, Yisub; Su, Jianxi

Publisher

Informa UK (Taylor & Francis); Taylor & Francis; Informa UK Limited; The Korean Institute of Electrical Engineers (ISSN 1092-0277)

Published

2020

Language

EN

Field

Economics, Econometrics and Finance (Social Sciences)