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An optimal investment strategy in bank management
Author(s) -
Witbooi Peter J.,
van Schalkwyk Garth J.,
Muller Grant E.
Publication year - 2011
Publication title -
mathematical methods in the applied sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.719
H-Index - 65
eISSN - 1099-1476
pISSN - 0170-4214
DOI - 10.1002/mma.1467
Subject(s) - capital adequacy ratio , basel ii , capital requirement , risk weighted asset , minimum capital , loan , economics , capital allocation line , retained earnings , equity (law) , basel iii , basel i , business , finance , actuarial science , microeconomics , financial capital , capital formation , profit (economics) , political science , law , debt
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. Copyright © 2011 John Wiley & Sons, Ltd.