Bank’s choice of loan portfolio under high regulation – example of Croatia

Neven Vidaković

MPRA Paper from University Library of Munich, Germany

Abstract: This paper creates a mathematical model in which the banks are faced with two optimization problems. The first optimization problem is how to optimize their behavior in order to maximize profits. The second optimization is how to optimize the structure of liabilities in order to have minimum regulation. The regulatory regime is imposed by the central bank. This paper investigates the behavior of banks when faced with high regulation and provides a theoretical framework for analysis of the impact of high regulation on the choice of the bank’s portfolio structure. The model shows the banks have a learning framework in which the banks learn the central bank’s true model and adjust their credit policies to existing regulatory regime. However this adjustment also creates changes in the choice of credit.

Keywords: credit; central bank regulation; dynamic programming; bayesian learning (search for similar items in EconPapers)
JEL-codes: C61 C73 E51 E58 (search for similar items in EconPapers)
Date: 2015-03
New Economics Papers: this item is included in nep-ban, nep-mac and nep-tra
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Journal Article: Bank’s choice of loan portfolio under high regulation – example of Croatia (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:63929

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