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Document Details :
Title: The Impact of Capital Structure on Economic Capital and Risk Adjusted Performance
Author(s): PORTEOUS, Bruce T. , TAPADAR, Pradip
Journal: ASTIN Bulletin
Volume: 38 Issue: 1 Date: May 2008
The impact that capital structure and capital asset allocation have on financial services firm economic capital and risk adjusted performance is considered. A stochastic modelling approach is used in conjunction with banking and insurance examples. It is demonstrated that gearing up Tier 1 capital with Tier 2 capital can be in the interests of bank Tier 1 capital providers, but may not always be so for insurance Tier 1 capital providers. It is also shown that, by allocating a bank or insurance firm’s Tier 1 and Tier 2 capital to higher yielding, more risky assets, risk adjusted performance can be enhanced. These results are particularly pertinent with the advent of the new Basel 2 and Solvency 2 risk based capital initiatives, for banks and insurers respectively.