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Optimal asset structure of a bank - bank reactions to stressful market conditions

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  • Hałaj, Grzegorz

Abstract

The aim of the paper is to propose a model of banks' asset portfolios to account for the strategic and optimising behavior of banks under adverse economic conditions. In the proposed modelling framework, banks are assumed to respond in an optimising manner to changes in their economic environment (e.g. interest rate and credit risk shocks, funding disruptions, etc.). The modelling approach is based on the risk-return optimal program in which banks aim at a particular composition of their assets to maximise risk-adjusted returns while taking into account regulatory capital and liquidity constraints. The approach is designed for applications in banks' stress testing context, as an alternative to the typical static balance sheet assumption. The stress testing applications are illustrated for a large sample of European banks. JEL Classification: E6

Suggested Citation

  • Hałaj, Grzegorz, 2013. "Optimal asset structure of a bank - bank reactions to stressful market conditions," Working Paper Series 1533, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131533
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1533.pdf
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    References listed on IDEAS

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    Cited by:

    1. Raffaella Calabrese & Johan A. Elkink & Paolo S. Giudici, 2017. "Measuring bank contagion in Europe using binary spatial regression models," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 68(12), pages 1503-1511, December.
    2. Ihrig, Jane E. & Kim, Edward & Kumbhat, Ashish & Vojtech, Cindy M. & Weinbach, Gretchen C., 2017. "How Have Banks Been Managing the Composition of High-Quality Liquid Assets?," Finance and Economics Discussion Series 2017-092, Board of Governors of the Federal Reserve System (US), revised 15 Feb 2018.
    3. Paola Cerchiello & Paolo Giudici, 2014. "Conditional graphical models for systemic risk measurement," DEM Working Papers Series 087, University of Pavia, Department of Economics and Management.

    More about this item

    Keywords

    banking; portfolio optimisation; stress-testing;

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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