Implementing a Quantitative Methodology to Translate Strategic Risk into Economic Capital for a Canadian Bank

This research paper focusses on a model to quantify strategic risk and calculate adequate capital that can be used to absorb losses in times of distress. Strategic risk, used interchangeably as business risk is relatively a new risk type and not as researched as other types like credit, market, operational etc. We analyse this subject particularly in the context of the Canadian economic environment. Most big banks are holding capital due to minimum capital requirements enforced by regulatory supervisors. However, there are no concrete explanations pertaining to the accounting of this risk type and the allocated capital. We use net income data for the Royal Bank of Canada and calculate Value at Risk and Expected Shortfall for Strategic risk. Our research can be used by Canadian regulators to mandate an efficient model for strategic risk calculations. By setting a common ground, this can be used by banks to calculate their strategic risk and compare it with their competitors. This will greatly reduce the ambiguity regarding the quantification of strategic risk and the associated capital held by Canadian banks