Bank Risk Management and the Franchise Value

We analyze optimal risk management strategies for a regulatory restricted bank financed with deposits and equity in an infinite horizonmodel. The bank has a positive franchise value from rents coming from deposit related services (liquidity provision, payment services, safety storage), and from rents on the asset side due to its delegated monitoring activity. This franchise value and the liquidation costs in case of a bank run give the bank a motivation for risk management. The franchise value reduces asset substitution incentives and enhances the value of hedging strategies with a zero probability of bankrun.