Open Access
2014 An Optimal Portfolio and Capital Management Strategy for Basel III Compliant Commercial Banks
Grant E. Muller, Peter J. Witbooi
J. Appl. Math. 2014: 1-11 (2014). DOI: 10.1155/2014/723873

Abstract

We model a Basel III compliant commercial bank that operates in a financial market consisting of a treasury security, a marketable security, and a loan and we regard the interest rate in the market as being stochastic. We find the investment strategy that maximizes an expected utility of the bank’s asset portfolio at a future date. This entails obtaining formulas for the optimal amounts of bank capital invested in different assets. Based on the optimal investment strategy, we derive a model for the Capital Adequacy Ratio (CAR), which the Basel Committee on Banking Supervision (BCBS) introduced as a measure against banks’ susceptibility to failure. Furthermore, we consider the optimal investment strategy subject to a constant CAR at the minimum prescribed level. We derive a formula for the bank’s asset portfolio at constant (minimum) CAR value and present numerical simulations on different scenarios. Under the optimal investment strategy, the CAR is above the minimum prescribed level. The value of the asset portfolio is improved if the CAR is at its (constant) minimum value.

Citation

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Grant E. Muller. Peter J. Witbooi. "An Optimal Portfolio and Capital Management Strategy for Basel III Compliant Commercial Banks." J. Appl. Math. 2014 1 - 11, 2014. https://doi.org/10.1155/2014/723873

Information

Published: 2014
First available in Project Euclid: 2 March 2015

zbMATH: 07010724
Digital Object Identifier: 10.1155/2014/723873

Rights: Copyright © 2014 Hindawi

Vol.2014 • 2014
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