© 2006

Optimal Risk-Return Trade-Offs of Commercial Banks

and the Suitability of Profitability Measures for Loan Portfolios


Part of the Lecture Notes in Economics and Mathematical Systems book series (LNE, volume 578)

Table of contents

  1. Front Matter
    Pages I-IX
  2. Pages 1-5
  3. Pages 7-22
  4. Pages 23-31
  5. Pages 33-43
  6. Pages 117-121
  7. Back Matter
    Pages 123-151

About this book


The present book criticizes the fact that profitability measures derived from capital market models such as the Sharpe ratio and the reward-to-VaR ratio are proposed for loan portfolios although it is not assessed whether their risk-return trade-offs are optimal for banks. This volume intends to fill this gap.

The approach of this work is to endogenously derive optimal risk-return trade-offs of commercial banks and to compare them with those of reward-to-risk ratios. The risk-return trade-offs for banks are derived taking into account market discipline, Basel I and Basel II regulatory capital requirements, and insured deposits.

It is found that even the reward-to-VaR ratio, which is explicitly developed for the purpose of valuating loan portfolios, can be highly misleading. The volume also helps in understanding risk management motives of banks, in particular, how market discipline, capital requirements, and insured deposits affect the decision-making of banks.


Basel I Basel II Commercial Bank Loan Portfolio Optimization Reward-to-Risk Ratio Risk-Return Trade-Off linear optimization

Authors and affiliations

  1. 1.JestettenGermany

Bibliographic information

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