Regulatory Capital Decisions in the context of Consumer Loan Portfolios
| dc.contributor.author | Rajaratnam, Kanshukan | |
| dc.contributor.author | Beling, Peter | |
| dc.contributor.author | Overstreet, George | |
| dc.date.accessioned | 2018-02-28T16:28:51Z | |
| dc.date.available | 2018-02-28T16:28:51Z | |
| dc.date.issued | 2016-04-06 | |
| dc.description.abstract | A topic of interest in recent literature is regulatory capital requirements for consumer loan portfolios. Banks are required to hold regulatory capital for unexpected losses, while expected losses are to be covered by either provisions or future income. In this paper, we show the set of efficient operating points in the market share and profit space for a portfolio manager operating under Basel II capital requirement and under capital constraints are a union of single-cutoff-score and double cutoff-score operating points. For a portfolio manager to increase market-share beyond the maximum allowable under a single-cutoff score policy (eg, with binding capital constraints) requires granting loans to higher than optimal risk applicants. We show this result in greater portfolio risk but without an increase in regulatory capital requirement amount. The increase in forecasted losses is assumed to be absorbed by provisions or future margin income. Given portfolio managers take on higher risk under the same regulatory capital amount, our findings call for greater focus on provision amounts and future margin income under the supervisory review pillar of Basel II. This research raises the issue of whether the design of the regulatory formula for consumer loan portfolios is flawed. | en_ZA |
| dc.identifier.apacitation | Rajaratnam, K., Beling, P., & Overstreet, G. (2016). Regulatory Capital Decisions in the context of Consumer Loan Portfolios. <i>Journal of the Operational Research Society</i>, http://hdl.handle.net/11427/27607 | en_ZA |
| dc.identifier.chicagocitation | Rajaratnam, Kanshukan, Peter Beling, and George Overstreet "Regulatory Capital Decisions in the context of Consumer Loan Portfolios." <i>Journal of the Operational Research Society</i> (2016) http://hdl.handle.net/11427/27607 | en_ZA |
| dc.identifier.citation | Rajaratnam, K., Beling, P. & Overstreet, G. (2016), Regulatory Capital Decisions in the context of Consumer Loan Portfolios. J Oper Res Soc. https://doi.org/10.1057/jors.2016.7 | en_ZA |
| dc.identifier.issn | 1476-9360 | en_ZA |
| dc.identifier.ris | TY - Journal Article AU - Rajaratnam, Kanshukan AU - Beling, Peter AU - Overstreet, George AB - A topic of interest in recent literature is regulatory capital requirements for consumer loan portfolios. Banks are required to hold regulatory capital for unexpected losses, while expected losses are to be covered by either provisions or future income. In this paper, we show the set of efficient operating points in the market share and profit space for a portfolio manager operating under Basel II capital requirement and under capital constraints are a union of single-cutoff-score and double cutoff-score operating points. For a portfolio manager to increase market-share beyond the maximum allowable under a single-cutoff score policy (eg, with binding capital constraints) requires granting loans to higher than optimal risk applicants. We show this result in greater portfolio risk but without an increase in regulatory capital requirement amount. The increase in forecasted losses is assumed to be absorbed by provisions or future margin income. Given portfolio managers take on higher risk under the same regulatory capital amount, our findings call for greater focus on provision amounts and future margin income under the supervisory review pillar of Basel II. This research raises the issue of whether the design of the regulatory formula for consumer loan portfolios is flawed. DA - 2016-04-06 DB - OpenUCT DP - University of Cape Town J1 - Journal of the Operational Research Society LK - https://open.uct.ac.za PB - University of Cape Town PY - 2016 SM - 1476-9360 T1 - Regulatory Capital Decisions in the context of Consumer Loan Portfolios TI - Regulatory Capital Decisions in the context of Consumer Loan Portfolios UR - http://hdl.handle.net/11427/27607 ER - | en_ZA |
| dc.identifier.uri | http://hdl.handle.net/11427/27607 | |
| dc.identifier.vancouvercitation | Rajaratnam K, Beling P, Overstreet G. Regulatory Capital Decisions in the context of Consumer Loan Portfolios. Journal of the Operational Research Society. 2016; http://hdl.handle.net/11427/27607. | en_ZA |
| dc.language | eng | en_ZA |
| dc.publisher | Journal of the Operational Research Society | en_ZA |
| dc.publisher.department | Department of Finance and Tax | en_ZA |
| dc.publisher.faculty | Faculty of Commerce | en_ZA |
| dc.publisher.institution | University of Cape Town | |
| dc.source | Journal of the Operational Research Society | en_ZA |
| dc.source.uri | https://link.springer.com/journal/41274 | |
| dc.subject.other | regulatory capital | |
| dc.subject.other | decision-making under risk | |
| dc.subject.other | Basel Accord | |
| dc.title | Regulatory Capital Decisions in the context of Consumer Loan Portfolios | en_ZA |
| dc.type | Journal Article | en_ZA |
| uct.type.filetype | Text | |
| uct.type.filetype | Image | |
| uct.type.publication | Research | en_ZA |
| uct.type.resource | Article | en_ZA |