Funding optimization for a bank integrating credit and liquidity risk

Petrus Strydom

Journal of Applied Finance & Banking, 2017, vol. 7, issue 2, 1

Abstract: In this paper we apply two optimization frameworks to determine the optimal wholesale funding mix of a bank given uncertainty in both credit and liquidity risk. A stochastic linear programming method is used to find the optimal strategy to be maintained across all scenarios. A recursive learning method is developed to provide the bank with a trading signal to dynamically adjust the wholesale funding mix as the macroeconomic environment changes. The performance of the two methodologies is compared in the final section.Mathematics Subject Classification: C61, G21, C53Keywords: Bank Funding, Optimization, Credit Risk, Liquidity Risk

Date: 2017
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