Optimal asset allocation for a bank under risk control

Motivated by the Basel III requirement we analyze an optimal Capital Adequacy Ratio subject to foreclosure risk exposure. We assume that the banker invests in treasuries, a stock index and a loan portfolio, where he/she wishes to maximize his/her expected utility of terminal wealth by selecting optimal investment and risk control strategies. The dynamics of the stock index and the banker’s risk exposure towards foreclosure is modeled as two...