Journal of Financial Intermediation Vol. 44 2020
Bank capital allocation under multiple constraints
Abstract
We study how a bank allocates capital across its business units when facing multiple constraints over several periods. If a constraint tightens – be it because of stricter regulation or higher risk – capital flows to the more efficient unit, i.e. the unit offering a higher marginal return on required capital. Relative efficiency helps explain how a policy measure targeting a specific business unit – e.g. imposing requirements for market risk, or ring-fencing lending – spills over to another, seemingly unrelated unit. It also helps explain the bank’s response to the tightening of a constraint that is contemporaneously slack but likely to bind later on.
- DOI
- 10.1016/j.jfi.2019.100844
- Volume
- 44
- Pages
- 100844
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref