Abstract

http://ssrn.com/abstract=2088956
 


 



Long-Term Bank Balance Sheet Management: Estimation and Simulation of Risk-Factors


John R. Birge


University of Chicago - Booth School of Business

Pedro Júdice


Business Research Unit, Instituto Superior de Ciencias do Trabalho e da Empresa (ISCTE)

June 21, 2012


Abstract:     
We propose a dynamic framework which encompasses the main risks in balance sheets of banks in an integrated fashion. Our contributions are fourfold: 1) solving a simple one-period model that describes the optimal bank policy under credit risk; 2) estimating the long-term stochastic processes underlying the risk factors in the balance sheet, taking into account the credit and interest rate cycles; 3) simulating several scenarios for interest rates and charge-offs; and 4) describing the equations that govern the evolution of the balance sheet in the long run. The models that we use address momentum and the interaction between different rates. Our results enable simulation of bank balance sheets over time given a bank's lending strategy and provides a basis for an optimization model to determine bank asset-liability management strategy endogenously.

Number of Pages in PDF File: 18

Keywords: Balance sheet management, asset-liability management, long-term risk, interest rate risk, credit risk

JEL Classification: C58, G21

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Date posted: June 22, 2012 ; Last revised: August 1, 2012

Suggested Citation

Birge, John R. and Júdice, Pedro, Long-Term Bank Balance Sheet Management: Estimation and Simulation of Risk-Factors (June 21, 2012). Available at SSRN: http://ssrn.com/abstract=2088956 or http://dx.doi.org/10.2139/ssrn.2088956

Contact Information

John R. Birge (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Chicago Booth School of Business Logo

Pedro Júdice
Business Research Unit, Instituto Superior de Ciencias do Trabalho e da Empresa (ISCTE) ( email )
Complexo Indeg/Iscte
Av. Professor Anibal Bettencourt
Lisboa, 1600-189
Portugal
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