A new approach to optimal capital allocation for RORAC maximization in banks

Woo-Young Kang and Sunil Poshakwale

Journal of Banking & Finance, 2019, vol. 106, issue C, 153-165

Abstract: We introduce a new model for optimal internal capital allocation, which would allow banks to maximize their Return on Risk-Adjusted Capital (RORAC) under regulatory and capital constraints. We extend the single period model of Buch et al., (2011) to a multi-period model and improve its forecasting accuracy by including the debt effect and Bayesian learning innovations. The empirical application shows that our model significantly improves the RORAC of a sample of banks listed in the S&P 500 index.

Keywords: Regulatory risk; Economic capital; Optimal capital allocation; Banks; Euler principle (search for similar items in EconPapers)
JEL-codes: C11 D81 E22 G21 G28 G31 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:106:y:2019:i:c:p:153-165

DOI: 10.1016/j.jbankfin.2019.06.006

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