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Banking Firm, Equity and Value at Risk

Author(s): Udo Broll | Anna Sobiech | Jack E. Wahl

Journal: Contemporary Economics
ISSN 2084-0845

Volume: 6;
Issue: 4;
Start page: 1;
Date: 2012;
Original page

The paper focuses on the interaction between the solvency probability of a banking firm and the diversification potential of its asset portfolio when determining optimal equity capital. The purpose of this paper is to incorporate value at risk (VaR) into the firm-theoretical model of a banking firm facing the risk of asset return. Given the necessity to achieve a confidence level for solvency, we demonstrate that diversification reduces the amount of equity. Notably, the VaR concept excludes a separation of equity policy and asset-liability management.
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