Financial Darwinism: Create Value or Self-Destruct in a World of Risk by Tilman Leo M

Author:Tilman, Leo M. [Tilman, Leo M.]
Language: eng
Format: epub
Tags: Business
ISBN: 9780470466254
Barnesnoble:
Goodreads: 8747196
Publisher: John Wiley & Sons
Published: 2008-12-01T00:00:00+00:00

The risk-based economic performance equation represents all earnings drivers in a consistent fashion that is grounded in economic reality. It helps filter out the complexity of the modern world of finance and connect the seemingly disparate macroeconomic and financial phenomena. Importantly, it formally separates risk taking from other economic value-generating activities, such as fees and balance sheet arbitrage, thus defining the role of risk management in executive decision making.

In turn, economic performance attribution affords a straightforward description of financial institutions’ business models, with the respective roles of fee-based and risk-taking activities clearly delineated. As illustrated in Appendix B, economic performance attribution goes hand-in-hand with modern risk-management tools in articulating risk/return characteristics of business models and providing a framework for optimization of risk-adjusted economic performance. As financial institutions move toward risk-based disclosures and fair valuation, economic performance attribution should become more directly linked to equity market valuations, which I discuss in detail in Chapter 5. Last, economic performance attribution ratios have relevance for risk-focused regulation since similarly chartered institutions may exhibit drastically different risk-based business models and overall risk exposures.

Having explained the drivers of economic performance through the risk-based economic performance equation, I turn next to describing the choices, tools, and practical solutions available to senior decision makers endeavoring to respond to the evolutionary challenges of the dynamic new world.

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