The Impact of Volcker Rule on Bank Profits and Default Probabilities

46 Pages Posted: 29 Oct 2012 Last revised: 20 Jun 2016

Sohhyun Chung

University of Michigan at Ann Arbor - Department of Mathematics

Jussi Keppo

National University of Singapore - NUS Business School

Xuchuan Yuan

Harbin Institute of Technology - School of Management

Date Written: June 19, 2016

Abstract

We analyze the impact of the Volcker Rule on a bank's earnings and default probability by using a stochastic control model where the bank maximizes its value by selecting an optimal dividend, recapitalization, and investment strategy. We calibrate the model to a sample of U.S. banks. Since the Volcker Rule decreases the trading book size and this way raises the illiquid banking book portfolio that is more difficult to control, our calibrated model implies that the rule raises the banks' default probability.

Keywords: bank capital, dividends, investment, banking regulation

JEL Classification: G21, G28, G32, G35

Suggested Citation

Chung, Sohhyun and Keppo, Jussi and Yuan, Xuchuan, The Impact of Volcker Rule on Bank Profits and Default Probabilities (June 19, 2016). Available at SSRN: https://ssrn.com/abstract=2167773 or http://dx.doi.org/10.2139/ssrn.2167773

Sohhyun Chung

University of Michigan at Ann Arbor - Department of Mathematics ( email )

2074 East Hall
530 Church Street
Ann Arbor, MI 48109-1043
United States

Jussi Keppo (Contact Author)

National University of Singapore - NUS Business School ( email )

1 Business Link
Singapore, 117592
Singapore

Xuchuan Yuan

Harbin Institute of Technology - School of Management ( email )

Heilongjiang
China

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