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Multiobjective optimization of credit capital allocation in financial institutions

Author

Listed:
  • Kamil J. Mizgier

    (Swiss Federal Institute of Technology Zurich)

  • Joseph M. Pasia

    (UBS AG)

Abstract

The evolution of international regulation leads to new capital requirements imposed on globally active companies. Financial services firms allocate capital to business lines in order to withstand the materializing credit losses and to measure the performance of various business lines. In this study, we introduce a methodology for optimal credit capital allocation based on operations research approach. In particular, we focus on the efficient allocation of capital to business lines characterized by credit risk losses and cost of capital. We compare different allocation methods and provide a rationale behind using the OR approach. Finally, we formulate a multiobjective optimization model to capital allocation problem and apply it to a real-world case of two financial conglomerates.

Suggested Citation

  • Kamil J. Mizgier & Joseph M. Pasia, 2016. "Multiobjective optimization of credit capital allocation in financial institutions," Central European Journal of Operations Research, Springer;Slovak Society for Operations Research;Hungarian Operational Research Society;Czech Society for Operations Research;Österr. Gesellschaft für Operations Research (ÖGOR);Slovenian Society Informatika - Section for Operational Research;Croatian Operational Research Society, vol. 24(4), pages 801-817, December.
    • Handle: RePEc:spr:cejnor:v:24:y:2016:i:4:d:10.1007_s10100-015-0384-9
    DOI: 10.1007/s10100-015-0384-9
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