Modeling of Bank Capital Adequacy Ratios via a Lévy Process-Driven Model

Our study is motivated by banking regulation that emphasizes risk minimization practices associated with assets and regulatory capital. In an attempt to address the problem of compliance to minimum capital adequacy ratios (CAR) and under assumptions about retained earnings, loan-loss reserves, the market and shareholder-bank owner relationships, we construct a stochastic dynamic model to describe the evolution of a bank capital adequacy ratios (CAR) via capital to total assets ratio (TCAR) and capital to risk weighted assets ratio (T1CAR) in a stochastic setting. In order to model the dynamics of the TCAR and T1CAR we derive stochastic differential equations driven by lévy processes. In this case, the simulation analysis is employed to verify the results