Investment and Credit Portfolio Selection under Basel II Capital Accord

Bank capital is the main shock absorber in facing the risks around it. Based on the Basel capital regulations, the capital adequacy ratio has taken into considerationcredit risk on the whole. However, the Basel II capital regulations (despite the calculation methods), in addition to the credit risk, takes the operational and marketrisk into account. While the capital requirement is emphasized by the central bank (saving depositor interests), bank managers with high risk appetite are in pursuit ofmaximizing the shareholders value. While considering the central bank capital requirement, the essential target by the managers is to maximize the return.In this article, the asset portfolio of Saman bank is divided into four groups of retail credits, large credits, stocks and bonds. Then, considering the Basel capitalrequirement and other requirements, the optimal share of each sub-portfolio of bank is determined by solving linear programming model with an average return goalfunction. Finally, the effect of the Basel II capital regulations on the optimal composition of the bank is analyzed.

Keywords:

Portfolio , Risk , Capital Adequacy , Basel Accord