Dynamic modelling of bank profits

A topical issue in financial economics is the development of a stochastic dynamic model for bank behaviour. Under the assumption that the loan market is imperfectly competitive, we investigate the evolution of banking items such as loans, provisions for loan losses and deposit withdrawals, Treasuries and deposits and their relationship with profit. A motivation for studying this type of problem is the need to generalize the more traditional discrete-time models that are being used in the majority of studies that analyse banks and their operational idiosyncracies. An important outcome of our research is an explicit model for bank profit based solely on the stochastic dynamics of bank assets (loans, Treasuries and reserves) and liabilities (deposits). By way of conclusion, we provide a brief discussion of some of the economic aspects of the dynamic bank modelling undertaken in the main body of the article.