Bank capital allocation under multiple constraints

Tirupam Goel, Ulf Lewrick and Nikola Tarashev ()

Journal of Financial Intermediation, 2020, vol. 44, issue C

Abstract: We study how a bank allocates capital across its business units when facing multiple constraints over several periods. If a constraint tightens – be it because of stricter regulation or higher risk – capital flows to the more efficient unit, i.e. the unit offering a higher marginal return on required capital. Relative efficiency helps explain how a policy measure targeting a specific business unit – e.g. imposing requirements for market risk, or ring-fencing lending – spills over to another, seemingly unrelated unit. It also helps explain the bank’s response to the tightening of a constraint that is contemporaneously slack but likely to bind later on.

Keywords: Internal capital market; Value-at-Risk; Leverage ratio; Return on capital (search for similar items in EconPapers)
JEL-codes: G21 G28 G3 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Working Paper: Bank capital allocation under multiple constraints (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:44:y:2020:i:c:s1042957319300609

DOI: 10.1016/j.jfi.2019.100844

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