DOI: 10.1002/asmb.2238 ISSN:

A model for bank reserves versus treasuries under Basel III

Garth J. van Schalkwyk, Peter J. Witbooi
  • Management Science and Operations Research
  • General Business, Management and Accounting
  • Modeling and Simulation

Recently, the Basel Committee on Banking Supervision introduced strategies to protect banks from running out of liquidity. These measures included an increase of the minimum reserves that the bank ought to hold, in response to the global financial crisis. We propose a model to minimize risk for a bank by finding an appropriate mix of diversification, balanced against return on the portfolio. In particular, we consider jump diffusion models of bank reserves in order to address the risk due to deposit withdrawals. We formulate a stochastic optimal control problem related to the minimization of deposit risk and the reserve process, the net cash flows from depository activity, and cumulative cost of the bank's provisioning strategy. We analyze the main risk management issues arising from the optimization problem, with respect to the reserve requirement ratio, supported by simulations. Copyright © 2017 John Wiley & Sons, Ltd.

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