Model of banking behavior : specification and estimation

This study aims to construct a model of the economic behavior of banks as intermediate sectors in macroeconomics that play an important role interplaying between financial and real markets based on a theoretical and empirical perspective. There are two distinguishing characteristics of our approach. First, we specify an economic model of banking behavior, following partially assets and liabilities management (ALM). As the primary object of our paper is to provide an understanding of a bank’s role in macroeconomics rather than the details of ALM, we abstract from that concept and embed its crucial factors into the model specification. Second, we assume that banks have two optimization problems: profit maximization and asset allocation. Banks are assumed to maximize the profit function which takes into consideration items of the balance sheet and income statement. Then, banks are assumed to attempt to determine their optimal portfolio. Although our model is remarkably simple, we consider that our framework is valid to illustrate the mechanism of the loan market.