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Optimal business model for financial institutions under post-crisis regulatory environment

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Abstract

Dodd-Frank Wall Street Reform regulations and other postcrisis regulations and guidelines have put enormous pressure on financial institutions to optimize the use of their scarce capital and to improve their return on equity (ROE) which has been significantly compressed compared to historical levels. Regulators have begun scrutinizing questionable actions and structures that are intended to mitigate capital restrictions and enhance ROE. Our article presents an alternative – a systematic and quantitative, yet flexible, methodology for banks to optimize their business models, maximize ROE, and right-size different businesses given capital constraints and strategic objectives. We use real data to demonstrate the application and validity of the approach, to derive certain conclusions regarding the optimal leverage (i.e., safe level of loan-to-capital ratios for banks), and to suggest other relevant applications.

Suggested Citation

  • Dehnad, Kosrow & Dehnad, Darius, 2013. "Optimal business model for financial institutions under post-crisis regulatory environment," Journal of Financial Transformation, Capco Institute, vol. 36, pages 49-54.
  • Handle: RePEc:ris:jofitr:1543
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    References listed on IDEAS

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    1. Bervas, A., 2006. "Market liquidity and its incorporation into risk management," Financial Stability Review, Banque de France, issue 8, pages 63-79, May.
    2. Anil Bangia & Francis X. Diebold & Til Schuermann & John D. Stroughair, 1998. "Modeling Liquidity Risk With Implications for Traditional Market Risk Measurement and Management," New York University, Leonard N. Stern School Finance Department Working Paper Seires 99-062, New York University, Leonard N. Stern School of Business-.
    3. Umut Çetin & Robert A. Jarrow & Philip Protter, 2008. "Liquidity risk and arbitrage pricing theory," World Scientific Book Chapters,in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 8, pages 153-183 World Scientific Publishing Co. Pte. Ltd..
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    Cited by:

    1. Michael, Bryane & Falzon, Joseph & Shamdasani, Ajay, 2015. "A Theory of Financial Services Competition, Compliance and Regulation," EconStor Preprints 107400, ZBW - German National Library of Economics.

    More about this item

    Keywords

    financial crisis; post-crisis; business model; financial institutions business model;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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