The impact of savings withdrawals on a banker’s capital holdings subject to Basel III Accord

Ryle S Perera, Kimitoshi Sato

Research output: Contribution to journalArticlepeer-review


In this paper, we analyze the impact of savings withdrawals on a bank’s capital holdings under Basel III capital regulation. We examine the interplay between savings withdrawals and the investment strategies of a bank, by extending the classical mean–variance paradigm to investigate the bankers optimal investment strategy. We solve this via an optimization problem under a mean–variance paradigm, subject to a quadratic optimization function which incorporates a running penalization cost alongside the terminal condition. By solving the Hamilton–Jacobi–Bellman (HJB) equation, we derive the closed-form expressions for the value function as well as the banker’s optimal investment strategies. Our study provides a novel insight into the way banks allocate their capital holdings by showing that in the presence of savings withdrawals, banks will increase their risk-free asset holdings to hedge against the forthcoming deposit withdrawals whilst facing short-selling constraints. Moreover, we show that if the savings depositors of the bank are more stock-active, an economic expansion will imply a greater reduction in bank savings. As a result, the banker will reduce his/her loan portfolio and will depend on high stock returns with short-selling constraints to conform to Basel III capital regulation.
Original languageEnglish
Article number2050006
Pages (from-to)1-30
Number of pages30
JournalAnnals of Financial Economics
Issue number2
Publication statusPublished - 17 Jun 2020


  • Bank asset allocation
  • Basel III Capital Accord
  • HJB equation
  • mean–variance optimization
  • Poisson process
  • savings deposits
  • mean-variance optimization


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