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Journal of Banking & Finance Vol. 106 2019

A new approach to optimal capital allocation for RORAC maximization in banks

Woo-Young Kang1,2; Sunil S. Poshakwale3

1 University of London · 2 Brunel University of London · 3 Cranfield University

open access

Abstract

We introduce a new model for optimal internal capital allocation, which would allow banks to maximize their Return on Risk-Adjusted Capital (RORAC) under regulatory and capital constraints. We extend the single period model of Buch et al. (2011) to a multi-period model and improve its forecasting accuracy by including the debt effect and Bayesian learning innovations. The empirical application shows that our model significantly improves the RORAC of a sample of banks listed in the S&P 500 index.

DOI
10.1016/j.jbankfin.2019.06.006
Volume
106
Pages
153-165
Language
en
Sources
openalex crossref bibtex:phds-export.bib

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