Financial intermediary's choice of borrowing

HuiChen Chiang

Applied Economics, 2007, vol. 40, issue 2, 251-260

Abstract: This research investigates several dynamic stochastic models of a bank's management problem of the term structures of its assets and liabilities. A bank can either eliminate most of its interest risk with appropriate options, or it can utilize its expertise in its core business and seek extraordinary profits. This research concerns a bank with the latter goal. In this model, the bank seeks to maximize the expected present value of dividend issued subject to the Federal Reserve's regulatory constraint and liquidity constraint. With this model, we find that if the available deposits are not too high and the level of liquid assets is high enough, then it is optimal for a bank to accept all of the available deposits. However, if the level of liquid assets is too low, then a bank should not issue a dividend or to accept any deposits. The properties are still valid even if the bank is not risk neutral.

Date: 2007
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DOI: 10.1080/00036840600749706

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