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Optimal minimum capital requirement : a profitability and risk management approach

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dc.contributor.author Campos, Luisa Braga
dc.date.accessioned 2012-10-12T19:57:29Z
dc.date.available 2012-10-12T19:57:29Z
dc.date.copyright 2012 en
dc.date.issued 2012-10-12
dc.identifier.uri http://hdl.handle.net/2429/43388
dc.description.abstract World banking operations shook during the Subprime Mortgage Crisis of 2008. This financial turmoil demonstrated that the international banking regulation, Basel II, had serious shortcomings and was not powerful enough to prevent a banking crisis. Researchers agree that Basel II underestimated the minimum capital requirement (MCR), requiring banks to hold insufficient capital to prevent the last crisis. The present research proposes a risk management framework for MCR calculations. The methodology has three stages: first, the development of a bank profit function (formulated following accounting principles and Profit Function Theory); second, the application of the previous function to derive the bank risk function(following the guidance of Modern Portfolio Theory); finally, the insertion of the latter function as the objective function into a constrained optimization (return on equity constraint). This framework is tested with aggregate data from Canadian banks from the period 2000 to 2010. The optimized capital (KO) is compared to the Basel II Standardized Approach MCR. The findings show that the profit function satisfactorily predicts bank profits, and it is useful development for future work. The risk function, however, does not properly represent the variance of profits. This together with the use of a linear constraint produced KO smaller than Basel II requirements, meaning that, as implemented, this framework cannot replace Basel II. Potential improvements to this framework are identified and proposed for further research. The most important contributions of this research are the development of the bank profit function and a preliminary exploration of this optimization framework to MCR determination. Although, in the current stage of its development, this framework cannot replace Basel II, it presents a new approach to MCR calculations that has the potential to strengthen international banking regulation. en
dc.language.iso eng en
dc.publisher University of British Columbia en
dc.title Optimal minimum capital requirement : a profitability and risk management approach en
dc.type Electronic Thesis or Dissertation en
dc.degree.name Master of Arts - MA en
dc.degree.discipline Interdisciplinary Studies en
dc.degree.grantor University of British Columbia en
dc.date.graduation 2013-05 en
dc.degree.campus UBCO en
dc.description.scholarlevel Graduate en

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