Working paper series // Frankfurt School of Finance & Management 79
Investment decisions of cooperative banks are very restricted to their risk capacity. A well defined and organised Risk Management Process supports those investment activities and assists to achieve a balanced situation between risk and return. Several ways can be chosen to allocate risk capital. The aim of this allocation is on the one hand to reduce risk as much as necessary to keep in line with self defined risk limits but on the other hand to get the highest possible return under those conditions. In this paper we first of all analyse and identify several risks in a cooperative bank and then quantify and measure for example interest rate risk with a non parametric Value-at-Risk-approach. Secondly we define risk capacity limits and then use a passive strategy to allocate the available risk capital.
Risk management risk capacity value-at-risk investment decision benchmark risk capital allocation present value bank controlling