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By Dr. Michel VERLAINE, ICN Business School, Head of the Banks, Funds and Markets Master specialization
It is well-known from the Modigliani-Miller Theorem, that in a frictionless world corporate risk management has no value, as investors can diversify their own portfolios. Risk Management takes value in a world with frictions such as taxes, bankruptcy costs, asymmetry of information and so on. This is the case also for financial institutions as the Modigliani-Miller Theorem also applies to them as well as to any market-based balance sheet like funds and Special Purpose Vehicles. With the existence of such frictions, financial constraints matter and financial constraints make financial institutions more risk averse.
This risk aversion creates...
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