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

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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

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  • Neven Vidakovic, 2015. "Bank’s choice of loan portfolio under high regulation – example of Croatia," FIP - Journal of Finance and Law, Effectus - University College for Law and Finance, vol. 2(1), pages 29-44.
    • Handle: RePEc:eff:journl:v:2:y:2015:i:1:p:29-44
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    References listed on IDEAS

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    1. Lars Peter Hansen & Thomas J Sargent, 2014. "Robust Control and Model Misspecification," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 6, pages 155-216, World Scientific Publishing Co. Pte. Ltd..
    2. Michael Woodford, 2006. "An Example of Robustly Optimal Monetary Policy with Near-Rational Expectations," Journal of the European Economic Association, MIT Press, vol. 4(2-3), pages 386-395, 04-05.
    3. Evan Kraft, 2002. "Foreign Banks in Croatia: Another Look," Working Papers 10, The Croatian National Bank, Croatia.
    4. Hansen, Lars Peter & Sargent, Thomas J., 2005. "Robust estimation and control under commitment," Journal of Economic Theory, Elsevier, vol. 124(2), pages 258-301, October.
    5. Tomislav Galac, 2010. "The Central Bank as Crisis-Manager in Croatia – A Counterfactual Analysis," Working Papers 27, The Croatian National Bank, Croatia.
    6. Olivier Jean Blanchard & Stanley Fischer, 1989. "Lectures on Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262022834, April.
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    More about this item

    Keywords

    credit; central bank regulation; dynamic programming; bayesian learning;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers

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