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Bank capital allocation under multiple constraints

Tirupam Goel, Ulf Lewrick and Nikola Tarashev

No 666, BIS Working Papers from Bank for International Settlements

Abstract: 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
Date: 2017-10
References: View references in EconPapers View complete reference list from CitEc
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