A Comprehensive Approach to the Capital Requirements Based on EVA

41 Pages Posted: 2 Apr 2021

See all articles by Ali Golbabaei

Ali Golbabaei

University of Isfahan, Faculty of Economics and Administrative Sciences

Mahmoud Botshekan

University of Isfahan - Faculty of Administrative Sciences and Economics

Date Written: March 12, 2021

Abstract

We propose a holistic approach to balance sheet management to show how banks can meet both regulatory capital (proposed under Basel III) and shareholders’ wealth simultaneously. Using the consolidated balance sheet, this work outlines a methodology for mapping between targeted credit risks based capital ratio and economic value added by which banks can predict their optimal balance sheet. The results of this study are as follows. First, using an ex-ante approach, we predict the optimized balance sheet in each year from the previous year's data. By imposing the restriction of a maximum of 5% possible changes in the balance sheet items compared to the real changes, we could make an optimized balance sheet in which we predict more EVA with the same capital ratio compared to the real performance in each year. Second, in the ex-post approach, we use the optimized balance sheet items predicted by the ex-ante approach and assume that if this optimized balance sheet is used by the bank in practice, how much more EVA will be gained. The results show that in this approach (the ex-post approach), we could generate more EVA. It means that if the bank had used this optimized balance sheet in practice, it could have made more EVA. Robustness tests also support our main results when we impose more restrictions on the analysis.

Keywords: Basel III, Capital Requirements, NSFR, Otimization

JEL Classification: G21; G28; C61

Suggested Citation

Golbabaei, Ali and Botshekan, Mahmoud, A Comprehensive Approach to the Capital Requirements Based on EVA (March 12, 2021). Available at SSRN: https://ssrn.com/abstract=3803317 or http://dx.doi.org/10.2139/ssrn.3803317

Ali Golbabaei (Contact Author)

University of Isfahan, Faculty of Economics and Administrative Sciences ( email )

Iran

Mahmoud Botshekan

University of Isfahan - Faculty of Administrative Sciences and Economics ( email )

Azadi Square
Isfahan
Iran

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