Multiobjective optimization of credit capital allocation in financial institutions

Kamil J. Mizgier () and Joseph M. Pasia
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Kamil J. Mizgier: Swiss Federal Institute of Technology Zurich
Joseph M. Pasia: UBS AG

Central European Journal of Operations Research, 2016, vol. 24, issue 4, No 2, 817 pages

Abstract: Abstract The evolution of international regulation leads to new capital requirements imposed on globally active companies. Financial services firms allocate capital to business lines in order to withstand the materializing credit losses and to measure the performance of various business lines. In this study, we introduce a methodology for optimal credit capital allocation based on operations research approach. In particular, we focus on the efficient allocation of capital to business lines characterized by credit risk losses and cost of capital. We compare different allocation methods and provide a rationale behind using the OR approach. Finally, we formulate a multiobjective optimization model to capital allocation problem and apply it to a real-world case of two financial conglomerates.

Keywords: Risk management; Capital allocation; Multiobjective optimization; Cost of capital; OR in banking (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10100-015-0384-9

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