Risk and Capital Adequacy in Commercial Banks
This book presents a new approach to the problems of monitoring and controlling risks within a bank or financial institution and the probability of bank failures in the United States. It explains how risks in financial institutions arise, how they can be measured, and how they can be kept at the lowest possible levels. Sherman Maisel and his colleagues put forward the idea that new quantitative tools for analyzing risk and assessing insurance premiums based on portfolio theory can be employed within the bank regulation and examination system to provide more objective evaluations. The application of quantitative methods constitutes a genuine breakthrough from earlier methods of planning and examination of banks based primarily on rule-of-thumb methods of operation.
The studies aim at improving decision making within banks and regulatory agencies. They show how the use of certain modern financial theories and models can enable bankers and regulators to quantify many of the risks of losses and of insolvency that banks face. In particular, they emphasize the need to plan for uncertainty and unpredictable events. Finally, the studies show how adequate capital can reduce risks and how the use of capital can be optimized.