Kang, Woo-YoungPoshakwale, Sunil S.2019-06-252019-06-252019-06-13Kang W-Y, Poshakwale S. (2019) A new approach to optimal capital allocation for RORAC maximisation in banks. Journal of Banking and Finance, Volume 106, September 2019, pp. 153-1650378-4266https://doi.org/10.1016/j.jbankfin.2019.06.006http://dspace.lib.cranfield.ac.uk/handle/1826/14258We introduce a new model for optimal internal capital allocation, which would allow banks to maximize their Return on Risk-Adjusted Capital (RORAC) under regulatory and capital constraints. We extend the single period model of Buch et al., (2011) to a multi-period model and improve its forecasting accuracy by including the debt effect and Bayesian learning innovations. The empirical application shows that our model significantly improves the RORAC of a sample of banks listed in the S&P 500 index.enAttribution-NonCommercial-NoDerivatives 4.0 InternationalRegulatory riskEconomic capitalOptimal capital allocationBanksEuler principleArticle23690640