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This article uses a Value‐at‐Risk approach to derive an estimator of the failure probability of a financial institution. The proposed approach can be applied to any profit/loss distribution, although Extreme Value (EV) theory also tells us that the most appropriate distributions are EV. The estimator suggested here is superior to the “Z” indicator of failure risk, which is sometimes used in the literature. Illustrative results confirm that the distribution selected makes a considerable difference to the results, and that estimates of failure probabilities based on the assumption of normality are too low to be valid.

The pre‐commitment approach to bank capital regulation proposes that banks self‐select capital reserve requirements, facing penalties ex post for incurring losses in excess of reserves, hence providing incentives for high‐ risk banks to choose higher capital requirements. In order to assess the validity of the pre‐commitment approach, this article analyzes its comparative statics within the context of a standard European option written against the bank's capital base. The author finds that this approach works when it is not needed (when banks possess unlimited capital and hence cannot fail), but not when it is.

One of the most significant recent developments in the risk measurement and management area has been the emergence of value at risk (VaR). The VaR of a portfolio is the maximum loss that the portfolio will suffer over a defined time horizon, at a specified level of probability known as the VaR confidence level. The VaR has proven to be a very useful measure of market risk, and is widely used in the securities and derivatives sectors: a good example is the RiskMetrics system developed by J.P. Morgan. VaR measures based on systems such as RiskMetrics' sister, CreditMetrics, have also shown their worth as measures of credit risk, and for dealing with credit‐related derivatives. In addition, VaR can be used to measure cashflow risks and even operational risks. However, these areas are mainly concerned with risks over a relatively short time horizon, and VaR has had a more limited impact so far on the insurance and pensions literatures that are mainly concerned with longer‐term risks.

One of the most important developments in portfolio risk management in the 1990s was the increased use of Value at Risk (VaR). VaR has enjoyed a spectacular rise, from being largely unknown at the beginning of the 1990s, to prominence among financial institutions and, more recently, also in the corporate world. VaR is particularly useful because it measures aggregate portfolio risk by accounting for correlations between the individual risk factors in a portfolio.

This article outlines a subjective approach to estimating value at risk (VaR) and its related confidence intervals based on priors of the profit/loss distribution and its parameters. In the tradition of Bayesian statistics, this pro‐duces probability density functions for VaR that allow for subjective uncertainty. The author shows that imple‐menting this approach can be intuitive, straightforward, and applicable to any parametric VaR. One of the more difficult issues in this area is how to assess the precision of estimates: VaR estimation is usually straightforward, but estimating a confidence interval for a VaR estimate is not. This article suggests that, by inferring VaR from prior beliefs, rather than thinking of VaR as dependent on an “objective” P/L distribution, interpreting estimated confidence intervals is less problematic

The purpose of this paper is to review the way in which auditing issues have been raised and addressed during the credit crunch and developing global financial crisis.

Analysis is based on a review of the academic auditing literature, regulatory and audit reports, together with papers from the financial press.

After highlighting the relative lack of media attention devoted to the external auditing function in the light of major corporate collapses, the paper considers what, contrastingly, is an active and ongoing series of responses to the current crisis on the part of auditing firms and the profession more generally. Through such analysis the paper explores a number of implications of the credit crunch for both auditing practice and research.

The paper is constrained in part by the rapidly unfolding nature of events, with important policy developments arising almost on a daily basis. The paper draws primarily on events up to the beginning of October 2008.

The paper has important messages for audit practice and research, including the technical capacities of external audits in the banking sector, the contributions of standard setting bodies and regulatory oversight, and the scope for enhanced dialogue between such parties and audit researchers.

The paper serves both to focus and stimulate analysis of the credit crunch on the audit profession. It demonstrates the complexity of contemporary practice and highlights the importance, especially from an educational perspective, of developing understanding of banking audit practice and associated regulatory interactions – including the presented possibilities both for research and enhanced academic‐practitioner dialogue.

Applies an error‐correction model to demand for money in five African economies: Congo, Côte d′Ivoire, Mauritius, Morocco and Tunisia. Attention is given to a set of opportunity cost variables including expected inflation, domestic interest rate, foreign interest rate and expected exchange‐rate depreciation. The empirical results show that the domestic interest rate plays a significant role in the demand for money functions for three of the five countries and external opportunity cost variables are significant for one of the others. The results show some diversity in money demand behaviour in the countries studied, but the error correction mechanism is always significant and in four out of five cases there is a short‐run inflation impact. The equations are subjected to a battery of tests and found to be statistically well‐behaved.