Optimal Risk-Return Trade-Offs of Commercial Banks - and the Suitability of Profitability Measures for Loan Portfolios (eBook)
The present book criticizes the fact that profitability measures
derived from capital market models such as the Sharpe ratio and the
reward-to-VaR ratio are proposed for loan portfolios although it is
not assessed whether their risk-return trade-offs are optimal for
banks. This volume intends to fill this gap. The approach of this
work is to endogenously derive optimal risk-return trade-offs of
commercial banks and to compare them with those of reward-to-risk
ratios. The risk-return trade-offs for banks are derived taking
into account market discipline, Basel I and Basel II regulatory
capital requirements, and insured deposits. It is found that even
the reward-to-VaR ratio, which is explicitly developed for the
purpose of valuating loan portfolios, can be highly misleading. The
volume also helps in understanding risk management motives of
banks, in particular, how market discipline, capital requirements,
and insured deposits affect the decision-making of banks.
