On the Stochastic Modelling and Solvency of Banking Systems

Authors:	Petersen Mark, North-West University (Potchefstroom), South Africa Burger Isobel, North-West University (Potchefstroom), South Africa Fouche Casper, North-West University (Potchefstroom), South Africa Mukuddem-Petersen Janine, North-West University (Potchefstroom), South Africa
Topic:	9.1 Economic & Business Systems
Session:	Finance and Banking
Keywords:	Internationally Active Bank; Capital Adequacy; Stochastic Modelling

Abstract

This paper investigates issues related to the capital adequacy regulation and philosophy of internationally active banks. We make a technical contribution to this discussion by constructing a stochastic continuous-time model for the dynamics of the capital adequacy ratio of such a bank. This ratio is obtained by dividing the bank's eligible regulatory capital (ERC) by its total risk-weighted assets (TRWAs) from credit, market and operational risk. In the main, our discussions about the ERC and TRWAs conform to the qualitative and quantitative standards prescribed by the Basel II Capital Accord.