Bank’s choice of loan portfolio under high regulation – example of Croatia

Vidakovic, Neven (2015): Bank’s choice of loan portfolio under high regulation – example of Croatia.

Abstract

This paper creates a mathematical model in which the banks are faced with two optimization problems. The first optimization problem is how to optimize their behavior in order to maximize profits. The second optimization is how to optimize the structure of liabilities in order to have minimum regulation. The regulatory regime is imposed by the central bank. This paper investigates the behavior of banks when faced with high regulation and provides a theoretical framework for analysis of the impact of high regulation on the choice of the bank’s portfolio structure. The model shows the banks have a learning framework in which the banks learn the central bank’s true model and adjust their credit policies to existing regulatory regime. However this adjustment also creates changes in the choice of credit.

• Item Type: MPRA Paper
• Language: English
• Keywords: credit, central bank regulation, dynamic programming, bayesian learning
• Subjects: C - Mathematical and Quantitative Methods > C6 - Mathematical Methods ; Programming Models ; Mathematical and Simulation Modeling > C61 - Optimization Techniques ; Programming Models ; Dynamic Analysis; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E51 - Money Supply ; Credit ; Money Multipliers; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies

References

Blanchard, O., Fischer S. (1989) Lectures on Macroeconomics, MIT Press

CNB Buletin 210 www.hnb.hr

Cooper, R., Adda, J. (2003) Dynamic Programming: Theory and Macroeconomic Applications, MIT Press, 296 pages

Galac, T. (2010) The Central Bank as Crisis-Manager in Croatia – A Counterfactual Analysis CNB working paper W - 27 December 2010

Hansen L. P., Sargent T., (1991a) Exact Linear Rational Expectations Models: Specification and Estimation, in Rational Expectations Econometrics, ed. by Lars Peter Hansen and Thomas J. Sargent, Westview Press. 293 pages

Hansen L. P., Sargent T., (1991b) Identification of Continuous Time Rational Expectations Models From Discrete Time Data, in Rational Expectations Econometrics, ed. by Lars Peter Hansen and Thomas J. Sargent, Westview Press,. 293 pages

Hansen L. P., Sargent T., (2005) ‘Certainty Equivalence’ and ‘Model Uncertainty’ Jon Faust, Athanasios Orphanides, and David Reifschneider editors Models and Monetary Policy: Research in the Tradition of Dale Henderson, Richard Porter, and Peter Tinsley. Board of Governors Federal Reserve System.

Hansen L. P., Sargent T., (2005a) Robust Estimation and Control under Commitment Journal of Economic Theory, Elsavier, volume 124, issue 2, pages 248–301.

Kraft, E. (2002) Foreign Banks in Croatia: Another Look Croatian National Bank Working Papers W-10

Kraft, E., Faulend M., Tepus, M. M. (1998) Report on the Credit Policies of Croatian Banks, Croatian National Bank Working Papers W-9

Ljungqvist L., Sargent, T. (2004) Recursive Macroeconomic Theory, Second Edition, MIT Press.

Ribnikar, I. (1993) Stoodstotne obvezne rezerve bank za knjižni denar Bančni vestnik, volume 42, issue. 9, pages 8-12

Ribnikar, I. (1995) The monetary system of a small currency area: the case of Slovenia. Dev. & int. coop. june/december 1995, volume 11, issue 20/21, pages 143-157

Ribnikar, I. (1999) Strukturni položaj denarnega trga v Sloveniji Bančni vestnik, volume 48, issue 6, pages 47-49

Ribnikar, I. (2004) Exchange rate regimes and monetary arrangements Zbornik radova Ekonomskoga fakulteta Rijeka volume 22, issue 2, pages. 9-23

Ribnikar, I. (2004) Rapid privatization of the banking sector and early adaptation of the euro. Ekonomska istraživanja, volume 17, issue 2, pages 33-44.

Rohatinski, Ž., Anušić, Z., Šonje V., (1995) Put u nisku inflaciju Hrvatska 1993-1994 Vlada Republike Hrvatske, Zagreb. 171 pages

Sargent T., Hansen L. P., Turmuhambetova, G., Williams, N. (2006) Robust Control and Model Misspecification Journal of Economic Theory, Volume 128, , pages 45 - 90

Sargent, T. (1986) Rational Expectations and Inflation Harper and Row, New York pages 212

Sargent, T.(1999) The Conquest of American Inflation Princeton University Press, 148 pages

Vidaković, N. (2005) Theory of Rational Expectations and Microeconomics of Debt Ekonomija/Economics, volume 12, issue 4 705-729

Woodford, M. (2006) An Example of Robustly Optimal Monetary Policy with Near-Rational Expectations Journal of the European Economic Association, volume 4, issue 2-3 , pages 386-395