A Model for Bank Profit Subject to Loan Losses

T. Bosch, J. Mukuddem-Petersen, M.A. Petersen, and C. Senosi (South Africa)


Modeling; Banks; Profitability; Loan Losses; Regulation.


The modeling of bank profitability has become more topi cal in the light of the implementation of new banking reg ulation on a worldwide basis. In this regard, our specific aim is to model bank profit subject to capital requirements based on reported Value-at-Risk (VaR) and operational measures. By way of achieving this, we investigate the discrete-time dynamics of bank items such as loan demand, supply and losses, deposits, Treasuries, intangible assets, capital and bank profit under the influence of macroeco nomic factors. Empirical data for Organization for Eco nomic Corporation and Development (OECD) countries is used to establish the relationship between macroeconomic activity, loan loss provisioning and profitability. In par ticular, there is overwhelming evidence to suggest that the dynamics of the latter two financial variables are strongly correlated with the business cycle. We also provide a brief discussion of the main issues related to bank profit and loan losses and their provisions.

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