Capital adequacy and risk management in banking industry. (23rd July 2015)

• Record Type: Journal Article
• Authors: Chakroun, Fatma; Abid, Fathi
• Is Part Of: Applied stochastic models in business and industry. Volume 32:Number 1(2016:Jan./Feb.)
• Page Start: 113
• Page End: 132
• Publication Date: 2015-07-23
• Subjects: capital adequacy -- risk management -- bank balance sheet -- stochastic modeling and optimal control -- Kalman filter; Stochastic analysis -- Periodicals; Stochastic processes -- Periodicals; Business mathematics -- Periodicals; Finance -- Mathematical models -- Periodicals; Industrial management -- Mathematical models -- Periodicals; 338.00151923
• DOI: 10.1002/asmb.2127
• Languages: English
• ISSNs: 1524-1904

Abstract

Abstract : The present paper deals with the issue of bank capital adequacy and risk management within a stochastic dynamic setting. In particular, an explicit risk aggregation and capital expression is provided regarding the portfolio choice and capital requirements special context. Such a framework leads to a nonlinear stochastic optimal control problem whose solution may be determined by means of dynamic programming algorithm. The pertaining analysis relies heavily on the stochastic dynamic modeling of such balance sheet items as securities, loans, and regulatory capital with stochastic interest rates. In this respect, the special Kalman filter approach is used for the purpose of estimating the model parameters. The reached findings reveal well that the Tunisian bank, subject of study, generally exceeds the minimum requirements and is adequately capitalized to maintain the appropriate capital amount level commensurate with the aggregate risk. Besides, empirical evidence on the regulations' impact on driving bank capitalization and risk‐taking behavior has also been highlighted. Copyright © 2015 John Wiley & Sons, Ltd.