publication . Article . 2016

The Impact of Capital Structure on Economic Capital and Risk Adjusted Performance

Bruce T. Porteous; Pradip Tapadar;
Open Access
  • Published: 14 Jul 2016 Journal: ASTIN Bulletin, volume 38, pages 341-380 (issn: 0515-0361, eissn: 1783-1350, Copyright policy)
  • Publisher: Cambridge University Press (CUP)
  • Country: United Kingdom
Abstract
<jats:p>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 th...
Subjects
free text keywords: Economics and Econometrics, Accounting, Finance, QA, Financial capital, Tier 1 capital, Economics, Finance, business.industry, business, Capital requirement, Economic capital, Capital adequacy ratio, Physical capital, Tier 2 capital, Risk-adjusted return on capital
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