Bank Valuation and Its Connections with the Subprime Mortgage Crisis and Basel II Capital Accord
The ongoing subprime mortgage crisis (SMC) and implementation of Basel II Capital Accord regulation have resulted in issues related to bank valuation and profitability becoming more topical. Profit is a major i...
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| Format: | Article |
| Language: | English |
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Wiley
2008-01-01
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| Series: | Discrete Dynamics in Nature and Society |
| Online Access: | http://dx.doi.org/10.1155/2008/740845 |
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| author | C. H. Fouche J. Mukuddem-Petersen M. A. Petersen M. C. Senosi |
| author_facet | C. H. Fouche J. Mukuddem-Petersen M. A. Petersen M. C. Senosi |
| author_sort | C. H. Fouche |
| collection | DOAJ |
| description | The ongoing subprime mortgage crisis (SMC) and implementation of Basel II
Capital Accord regulation have resulted in issues related to bank
valuation and profitability becoming more topical. Profit is a major
indicator of financial crises for households, companies, and financial institutions. An SMC-related example of this is the U.S. bank,
Wachovia Corp., which reported major losses in the first quarter of 2007
and eventually was bought by Citigroup in September 2008. A first
objective of this paper is to value a bank subject to Basel II based
on premiums for market, credit, and operational risk. In this case, we
investigate the discrete-time dynamics of banking assets, capital, and
profit when loan losses and macroeconomic conditions are explicitly
considered. These models enable us to formulate an optimal bank
valuation problem subject to cash flow, loan demand, financing, and
balance sheet constraints. The main achievement of this paper is bank
value maximization via optimal choices of loan rate and supply which
leads to maximal deposits, provisions for deposit withdrawals, and bank
profitability. The aforementioned loan rates and capital provide
connections with the SMC. Finally, OECD data confirms that loan loss
provisioning and profitability are strongly correlated with the
business cycle. |
| format | Article |
| id | doaj-art-1c79a44820a8463297a439f6544a681f |
| institution | Kabale University |
| issn | 1026-0226 1607-887X |
| language | English |
| publishDate | 2008-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | Discrete Dynamics in Nature and Society |
| spelling | doaj-art-1c79a44820a8463297a439f6544a681f2025-02-03T06:08:34ZengWileyDiscrete Dynamics in Nature and Society1026-02261607-887X2008-01-01200810.1155/2008/740845740845Bank Valuation and Its Connections with the Subprime Mortgage Crisis and Basel II Capital AccordC. H. Fouche0J. Mukuddem-Petersen1M. A. Petersen2M. C. Senosi3Absa Bank, Division of Retail Banking Business Performance, 2000 Johannesburg, South AfricaDepartment of Mathematics and Applied Mathematics, North-West University, 2520 Potchefstroom, South AfricaDepartment of Mathematics and Applied Mathematics, North-West University, 2520 Potchefstroom, South AfricaDepartment of Mathematics and Applied Mathematics, North-West University, 2520 Potchefstroom, South AfricaThe ongoing subprime mortgage crisis (SMC) and implementation of Basel II Capital Accord regulation have resulted in issues related to bank valuation and profitability becoming more topical. Profit is a major indicator of financial crises for households, companies, and financial institutions. An SMC-related example of this is the U.S. bank, Wachovia Corp., which reported major losses in the first quarter of 2007 and eventually was bought by Citigroup in September 2008. A first objective of this paper is to value a bank subject to Basel II based on premiums for market, credit, and operational risk. In this case, we investigate the discrete-time dynamics of banking assets, capital, and profit when loan losses and macroeconomic conditions are explicitly considered. These models enable us to formulate an optimal bank valuation problem subject to cash flow, loan demand, financing, and balance sheet constraints. The main achievement of this paper is bank value maximization via optimal choices of loan rate and supply which leads to maximal deposits, provisions for deposit withdrawals, and bank profitability. The aforementioned loan rates and capital provide connections with the SMC. Finally, OECD data confirms that loan loss provisioning and profitability are strongly correlated with the business cycle.http://dx.doi.org/10.1155/2008/740845 |
| spellingShingle | C. H. Fouche J. Mukuddem-Petersen M. A. Petersen M. C. Senosi Bank Valuation and Its Connections with the Subprime Mortgage Crisis and Basel II Capital Accord Discrete Dynamics in Nature and Society |
| title | Bank Valuation and Its Connections with the Subprime Mortgage
Crisis and Basel II Capital
Accord |
| title_full | Bank Valuation and Its Connections with the Subprime Mortgage
Crisis and Basel II Capital
Accord |
| title_fullStr | Bank Valuation and Its Connections with the Subprime Mortgage
Crisis and Basel II Capital
Accord |
| title_full_unstemmed | Bank Valuation and Its Connections with the Subprime Mortgage
Crisis and Basel II Capital
Accord |
| title_short | Bank Valuation and Its Connections with the Subprime Mortgage
Crisis and Basel II Capital
Accord |
| title_sort | bank valuation and its connections with the subprime mortgage crisis and basel ii capital accord |
| url | http://dx.doi.org/10.1155/2008/740845 |
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