Bank capital allocation under multiple constraints
Ulf Lewrick and
No 666, BIS Working Papers from Bank for International Settlements
Banks allocate capital across business units while facing multiple constraints that may bind contemporaneously or only in future states. When risks rise or risk management strengthens, a bank reallocates capital to the more efficient unit. This unit would have generated higher constraint- and risk-adjusted returns while satisfying a tightened constraint at the old capital allocation. Calibrated to US data, our model reveals that, when credit or market risk increases, market-making attracts capital and lending shrinks. Leverage constraints affect banks only when measured risks are low. At low credit risk, tighter leverage constraints may reduce market-making but support lending.
Keywords: internal capital market; Value-at-Risk; leverage ratio; risk-adjusted return on capital (search for similar items in EconPapers)
JEL-codes: G21 G28 G3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-rmg
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