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An optimal investment strategy in bank management

✍ Scribed by Peter J. Witbooi; Garth J. van Schalkwyk; Grant E. Muller

Publisher
John Wiley and Sons
Year
2011
Tongue
English
Weight
192 KB
Volume
34
Category
Article
ISSN
0170-4214

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✦ Synopsis

This paper considers the application of stochastic optimization theory to asset and capital adequacy management in banking. The Basel II Capital Accord lays down regulations to control bank behaviour, and relies on regulatory ratios such as the capital adequacy ratio (CAR). In an attempt to address the problem of compliance to minimum CAR and under assumptions about retained earnings, loan-loss reserves, the market and shareholder-bank owner relationships, we construct a continuous-time model of the Basel II CAR which is computed from the total risk-weighted assets (TRWAs) and bank capital in a stochastic setting. In particular, we derive an optimal equity allocation strategy for the bank and monitor the performance of the Basel II CAR under the allocation strategy.

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