Optimal bank and regulatory capital reserve strategies under loan-loss uncertainty

Evatt, G; Johnson, P; Cheng, M; Glover, K

Optimal bank and regulatory capital reserve strategies under loan-loss uncertainty

Evatt, G Johnson, P Cheng, M Glover, K

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Publisher:: University of NSW
Publication Type:: Conference Proceeding
Citation:: Proceedings of the 25th Australasian Finance and Banking Conference 2012, 2012, pp. 1 - 25
Issue Date:: 2012-01

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Field	Value	Language
dc.contributor.author	Evatt, G	en_US
dc.contributor.author	Johnson, P	en_US
dc.contributor.author	Cheng, M	en_US
dc.contributor.author	Glover, K https://orcid.org/0000-0002-1518-3482	en_US
dc.contributor.editor	al, FME	en_US
dc.date	2012-12-16	en_US
dc.date.issued	2012-01	en_US
dc.identifier.citation	Proceedings of the 25th Australasian Finance and Banking Conference 2012, 2012, pp. 1 - 25	en_US
dc.identifier.isbn	978-0-9873127-4-7	en_US
dc.identifier.uri	http://hdl.handle.net/10453/31681
dc.description.abstract	We formulate a general model of a commercial bank and its regulator where the bank's loans are exposed to default risk. The bank's objective is to maximise equity value by appropriately controlling the rate at which new loans are issued, early clo- sure, and dividend payments. The regulator's objective is to reduce the probability of the bank's early closure, which they achieve by appropriately controlling the bank's minimum capital requirements. We show that the regulator can in fact minimise this probability of closure, which is achieved via suitably balancing the risk of insolvency (associated with lower capital requirements) and the risk of endogenous closure (as- sociated with higher capital requirements). Both analytic and numerical results are presented, thus allowing for the full non-linearity of the model to be understood.	en_US
dc.publisher	University of NSW	en_US
dc.relation.ispartof	Proceedings of the 25th Australasian Finance and Banking Conference 2012	en_US
dc.relation.ispartof	Australasian Finance and Banking Conference	en_US
dc.title	Optimal bank and regulatory capital reserve strategies under loan-loss uncertainty	en_US
dc.type	Conference Proceeding
utslib.location	Sydney, Australia	en_US
utslib.location.activity	Sydney, Australia	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
dc.location.activity	Sydney, Australia
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
pubs.organisational-group	/University of Technology Sydney/Faculty of Business/Finance Discipline
pubs.organisational-group	/University of Technology Sydney/Strength - QFRC - Quantitative Finance Research Centre
utslib.copyright.status	closed_access
pubs.consider-herdc	true	en_US
pubs.finish-date	2012-12-18	en_US
pubs.place-of-publication	Sydney, Australia	en_US
pubs.start-date	2012-12-16	en_US

Abstract:

We formulate a general model of a commercial bank and its regulator where the bank's loans are exposed to default risk. The bank's objective is to maximise equity value by appropriately controlling the rate at which new loans are issued, early clo- sure, and dividend payments. The regulator's objective is to reduce the probability of the bank's early closure, which they achieve by appropriately controlling the bank's minimum capital requirements. We show that the regulator can in fact minimise this probability of closure, which is achieved via suitably balancing the risk of insolvency (associated with lower capital requirements) and the risk of endogenous closure (as- sociated with higher capital requirements). Both analytic and numerical results are presented, thus allowing for the full non-linearity of the model to be understood.

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http://hdl.handle.net/10453/31681