Reduced-form capital optimisation

Yadong Li, Dimitri Offengenden, Jan Burgy
25 Sep 2019

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Yadong Li, Dimitri Offengenden and Jan Burgy formulate banks’ capital optimisation problem as a classic mean-variance optimisation by leveraging an accurate linear approximation to the Shapely allocation of a max cost function. This reduced-form formulation admits an analytical solution to the optimal allocation of the leveraged balance sheet and risk-weighted assets among a bank’s business units, which maximises the bank’s return on capital

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Reduced-form capital optimisation

A linear approximation to an allocation technique provides a solution for banks’ capital managment

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