Financial Modelling in the Banking Industry

C.H. Fouche, M.A. Petersen, and J. Mukuddem-Petersen (South Africa)


Banks; Dynamic Modeling; Levy Processes.


L´evy processes are beginning to emerge as an important tool for modeling economic indices in institutional finance. In this paper, we investigate the stochastic dynamics of banking items such as loans, reserves and capital that are driven by such processes. Furthermore, we discuss two types of bank provisioning that involve provisions being made for loan losses and deposit withdrawals. The for mer is related to the earnings that the bank sets aside in order to cover loan defaults. Also, our stochastic dynamic models enable us to analyze the interplay between deposit withdrawals and the provisioning for these withdrawals via treasuries and reserves.

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