This paper deals with a capital to risk asset ratio chance-constrained optimization model in the presence of loans, treasury bill, fixed assets and non-interest earning assets. To model the dynamics of loans, we introduce a modified CreditMetrics approach. This leads to development of a deterministic convex counterpart of capital to risk asset ratio chance constraint. We pursue the scope of analyzing our model under the worst-case scenario i.e. loan default. The theoretical model is analyzed by applying numerical procedures, in order to administer valuable insights from a financial outlook. Our results suggest that, our capital to risk asset ratio chance-constrained optimization model guarantees banks of meeting capital requirements of Basel III with a likelihood of 95 % irrespective of changes in future market value of assets.
CITATION STYLE
Atta Mills, E. F. E., Yu, B., & Gu, L. (2016). On meeting capital requirements with a chance-constrained optimization model. SpringerPlus, 5(1). https://doi.org/10.1186/s40064-016-2110-z
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