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Calculating Strategic Risk in Financial Institutions
Tomer Kedarya1, Amir Elalouf1, Rafael Sherbu Cohen2
1Department of Management, Bar-Ilan University, 52900 Ramat-Gan, Israel.
Global Journal of Flexible Systems Management
|June 26, 2023
Summary
This study introduces a new metric for calculating strategic risk in banks, addressing a gap in current risk management practices. It aims to improve capital adequacy calculations and enhance bank stability against financial hazards.
Area of Science:
- Financial Risk Management
- Banking Regulation
- Quantitative Finance
Background:
- Strategic risk poses significant, yet difficult-to-quantify, threats to bank profitability and stability.
- Existing literature highlights the need for strategic risk management under Basel II and its link to economic capital.
- A practical methodology for assessing and integrating strategic risk into capital adequacy remains underdeveloped.
Purpose of the Study:
- To address the gap in strategic risk management by providing a mathematical framework for analysis.
- To develop a quantifiable metric for strategic risk relative to a bank's risk assets.
- To propose a method for incorporating this strategic risk metric into capital adequacy ratio calculations.
Main Methods:
- Mathematical analysis of strategic risk factors' probability and impact.
- Development of a novel metric for quantifying strategic risk.
- Integration methodology for the strategic risk metric into capital adequacy calculations.
Main Results:
- A quantifiable metric for strategic risk in relation to bank risk assets has been developed.
- A method for integrating this metric into capital adequacy ratio calculations is proposed.
- The study provides a foundational action plan for strategic risk assessment.
Conclusions:
- Effective strategic risk management is crucial for long-term bank stability and profitability.
- The proposed metric and integration method offer a practical approach to quantifying and managing strategic risk.
- This research contributes to advancing the field of strategic risk analysis in banking.
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