Risk-Return Optimization of the Bank Portfolio

Abstract

In an intensifying competition banks are forced to develop and implement enterprise wide integrated risk-return management systems. Financial risks have to be limited and managed from a bank wide portfolio perspective. Risk management rules must be accomplished from internal and regulatory points of view. Expected returns need to be maximized subject to these constraints, leading to a generalized portfolio optimization problem under different capital limits. We give a survey on a risk-return optimization model for the bank portfolio that maximizes the expected returns to the planning horizon with respect to internal and regulatory loss risk constraints. We derive consistent planning information that ensures efficient return targets and maximal capital use of the economic and the regulatory capital. The impact of the optimization is shown by an application example.