How to Make Regulators and Shareholders Happy Under Basel III

27 Pages Posted: 23 Nov 2012 Last revised: 8 Aug 2013

See all articles by Christian Schmaltz

Christian Schmaltz

Aarhus University; True North Institute

Sebastian Pokutta

Georgia Institute of Technology

Thomas Heidorn

Frankfurt School of Finance & Management

Silvio Andrae


Date Written: November 22, 2012


In addition to the Basel II capital ratio, Basel III requires banks to respect additional ratios, such as leverage ratio, liquidity coverage ratio and net stable funding ratio. Banks are required to be compliant with all four constraints simultaneously. Our article provides a framework for banks to help their search for an optimal, compliant business model. Recognizing that banks’ return and the four constraints are of linear type, this search can be formulated as a linear program and solved by standard software. Our approach can be customized to individual board preferences: to achieve compliance (making regulators happy) with a minimum of adjustments and still respecting a target return (making shareholders happy). Our approach needs two standard inputs from controlling: average profit margins per product and adjustment costs to expand or cut back business. To highlight its practicality, the approach is presented as industry study with figures from three representative German savings bank. We show in detail how our approach can deal with the numerous ratio interdependencies inherent in Basel III. Furthermore we discuss how our framework interacts with banks’ internal stress testing model to derive internal Basel III - target ratios and how it can incorporate potential future changes in product profitability.

Keywords: Basel III, Planning, Linear Programming, Capital Ratio, Leverage Ratio, LCR, NSFR

JEL Classification: G21, C61

Suggested Citation

Schmaltz, Christian and Schmaltz, Christian and Pokutta, Sebastian and Heidorn, Thomas and Andrae, Silvio, How to Make Regulators and Shareholders Happy Under Basel III (November 22, 2012). Available at SSRN: or

Christian Schmaltz (Contact Author)

Aarhus University ( email )

Nordre Ringgade 1
Aarhus, DK-8000

True North Institute ( email )

145-157 St. John Street
London, EC1V 4PY
United Kingdom
+49-17621761996 (Phone)


Sebastian Pokutta

Georgia Institute of Technology ( email )

Atlanta, GA 30332
United States

Thomas Heidorn

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322

Silvio Andrae

Independent ( email )

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