title: On meeting capital requirements with a chance-constrained optimization model.
abstract: This paper deals with a capital to risk asset ratio chance-constrained optimization model in the presence of loans, treasury bill, fixed assets and non-interest earning assets. To model the dynamics of loans, we introduce a modified CreditMetrics approach. This leads to development of a deterministic convex counterpart of capital to risk asset ratio chance constraint. We pursue the scope of analyzing our model under the worst-case scenario i.e. loan default. The theoretical model is analyzed by applying numerical procedures, in order to administer valuable insights from a financial outlook. Our results suggest that, our capital to risk asset ratio chance-constrained optimization model guarantees banks of meeting capital requirements of Basel III with a likelihood of 95 % irrespective of changes in future market value of assets.
authors.affiliation: School of Mathematical Sciences, Dalian University of Technology, Dalian, 116024 China.
authors.forename: Ebenezer Fiifi Emire
authors.initials: EF
authors.lastname: Atta Mills
authors.affiliation: School of Mathematical Sciences, Dalian University of Technology, Dalian, 116024 China.
authors.forename: Bo
authors.initials: B
authors.lastname: Yu
authors.affiliation: School of Mathematical Sciences, Dalian University of Technology, Dalian, 116024 China.
authors.forename: Lanlan
authors.initials: L
authors.lastname: Gu
keywords: Basel accord; Capital to risk asset ratio; Chance constraint; CreditMetrics