Bank's Portfolio Management under Uncertainty

Abstract

The major objective of this paper is to derive a set of optimal decision rules (for asset or inventory management) for a commercial bank operating under uncertain circumstances (subject to stochastic deposit loss). The bank is assumed to be maximizing the expected utility derived from it's net income. This objective is realized by the marginal conditions of the model. It shows how and under what conditions, the banker should expand loans at the expense of securities and/or excess reserves and how he adjusts to de-regulations and how the change in uncertainty about the deposit loss affects him.