Dear David,
I don't understand it when you said on page 43 of "2008 FRM Operational Risk Discipline Study Notes" that: if the firm incurs a large loss and has no liquid assets to finance the loss, the buffer stock of book equity will not matter." Based on my interpretation of your notes, the buffer stock of equity available = valuable assets not on books + book equity capital and this is especially so when the assets are very liquid. Therefore I think when there is no liquid asset to finance the loss, the book equity capital should constitute the whole buffer stock. Please kindly correct my thought. Thanks!
Cheers
Liming
19/10/09
I don't understand it when you said on page 43 of "2008 FRM Operational Risk Discipline Study Notes" that: if the firm incurs a large loss and has no liquid assets to finance the loss, the buffer stock of book equity will not matter." Based on my interpretation of your notes, the buffer stock of equity available = valuable assets not on books + book equity capital and this is especially so when the assets are very liquid. Therefore I think when there is no liquid asset to finance the loss, the book equity capital should constitute the whole buffer stock. Please kindly correct my thought. Thanks!
Cheers
Liming
19/10/09
