Liquidity effects in banks’ capital allocation decisions

Wenersamy de Alcantara

Journal of Risk Management in Financial Institutions, 2015, vol. 8, issue 2, 163-170

Abstract: Risk-adjusted models for capital allocation are now well known and still evolving. This paper contributes to the evolution of these models by pointing out liquidity effects that are currently ignored. This paper proposes a risk-adjusted model for banks’ capital allocation decisions that incorporates the banks’ default risk reduction of investing in liquid assets, offsetting the positive economic profit advantages of illiquid assets.

Keywords: risk-adjusted returns; liquidity; capital allocation (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:aza:rmfi00:y:2015:v:8:i:2:p:163-170

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