Maximizing Banking Profit on a Random Time Interval

Mukuddem‐Petersen, J.; Petersen, Mark A.; Schoeman, I. M.; Tau, B. A.

doi:10.1155/2007/29343

Cited by 8 publications

(16 citation statements)

References 28 publications

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“…As far as banking regulation is concerned, we note that formal models that enable aspects of Basel II to be analyzed is suggested in [16,22]. In fact, when discussing the main issues that arise from the models in our paper, we make liberal use of the investigations undertaken in these contributions (see, also [23][24][25]). …”

Section: Relationship To Previous Literaturementioning

confidence: 99%

Optimal auditing in the banking industry

Bosch¹,

Mukuddem‐Petersen

Petersen

et al. 2007

Optim Control Appl Methods

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As a result of the new regulatory prescripts for banks, known as the Basel II Capital Accord, there has been a heightened interest in the auditing process. Our paper considers this issue with a particular emphasis on the auditing of reserves, assets and capital in both a random and non-random framework. The analysis relies on the stochastic dynamic modeling of banking items such as loans, reserves, Treasuries, outstanding debts, bank capital and government subsidies. In this regard, one of the main novelties of our contribution is the establishment of optimal bank reserves and a rate of depository consumption that is of importance during an (random) audit of the reserve requirements. Here the specific choice of a power utility function is made in order to obtain an analytic solution in a Lévy process setting. Furthermore, we provide explicit formulas for the shareholder default and regulator closure rules, for the case of a Poisson-distributed random audit. A property of these rules is that they define the standard for minimum capital adequacy in an implicit way. In addition, we solve an optimal auditing time problem for the Basel II capital adequacy requirement by making use of Lévy process-based models. This result provides information about the optimal timing of an internal audit when the ambient value of the capital adequacy ratio is taken into account and the bank is able to choose the time at which the audit takes place. Finally, we discuss some of the economic issues arising from the analysis of the stochastic dynamic models of banking items and the optimization procedure related to the auditing process.

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Section: Relationship To Previous Literaturementioning

confidence: 99%

Optimal auditing in the banking industry

Bosch¹,

Mukuddem‐Petersen

Petersen

et al. 2007

Optim Control Appl Methods

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“…The paper also contains discussions on prices and penalties and their relationship with loan-tovalue ratios (see, also, [18] for more on house equity). In our contribution, we will use the framework introduced in [16] to show how a change in profit subsequent to a negative shock is influenced by subprime mortgage features (see, also, [19]).…”

Section: Literature Review About Asset Securitizationmentioning

confidence: 99%

“…In this paper, we have that the reference asset portfolios are both a means of generating CDOs and collateral for interentity sponsoring (see, e.g., [1]). Our paper quantifies the effects of unexpected negative shocks such as rating downgrades on asset price and input, CDO price and output, and profit in a Basel III context (see, also, [19]). For instance, the aforementioned result demonstrates how the proportional change in profit subsequent to a rating downgrade is influenced by LQA features such as asset rates.…”

Section: Preliminaries About Lqa and Hqa Securitizationmentioning

confidence: 99%

“…In general, the asset rate, , for profit maximizing entities (see, also, [19]), may be represented as…”

Section: Low-and High-quality Entitiesmentioning

confidence: 99%

“…Lemma 5 (HQE cash flow constraint). Suppose that the credit constraint (3) as well as (16) to (19) holds. In this case, the HQEs' cash flow constraint is given by…”

Section: Lemma 3 (Lqe Cash Flow Constraint) Suppose That the Credit mentioning

confidence: 99%

See 2 more Smart Citations

Basel III and Asset Securitization

Mpundu

Petersen

Mukuddem‐Petersen

et al. 2013

Discrete Dynamics in Nature and Society

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Asset securitization via special purpose entities involves the process of transforming assets into securities that are issued to investors. These investors hold the rights to payments supported by the cash flows from an asset pool held by the said entity. In this paper, we discuss the mechanism by which low-and high-quality entities securitize low-and high-quality assets, respectively, into collateralized debt obligations. During the 2007-2009 financial crisis, asset securitization was seriously inhibited. In response to this, for instance, new Basel III capital and liquidity regulations were introduced. Here, we find that we can explicitly determine the transaction costs related to low-quality asset securitization. Also, in the case of dynamic and static multipliers, the effects of unexpected negative shocks such as rating downgrades on asset price and input, debt obligation price and output, and profit will be quantified. In this case, we note that Basel III has been designed to provide countercyclical capital buffers to negate procyclicality. Moreover, we will develop an illustrative example of low-quality asset securitization for subprime mortgages. Furthermore, numerical examples to illustrate the key results will be provided. In addition, connections between Basel III and asset securitization will be highlighted.

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Capital adequacy and risk management in banking industry

Chakroun

Abid

2015

Appl Stoch Models Bus & Ind

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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.

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Maximizing Banking Profit on a Random Time Interval

Cited by 8 publications

References 28 publications

Optimal auditing in the banking industry

Optimal auditing in the banking industry

Basel III and Asset Securitization

Capital adequacy and risk management in banking industry

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