Authors: Konstantinos Liapis, Sotirios Trigkas

Title: The control of Small Medium Banks profitability using financial modeling approach under certainty and uncertainty.

Abstract

In recent years business plans are used in banking industry for several reasons. Following a prototype economic modeling approach for Small-Medium Banks (SMBs) business plans according to structure of Additional Funds Needed (AFN) models this paper examines the volatility of banking efficiency in terms of key profitability variables (KPVs). The KPVs are the size and structure of deposits, loans and their interest rates. Initially we examine the intervals in which the KPVs of the SMB are moving.  Then we conduct a sensitivity analysis under certainty and uncertainty. Furthermore, we proceed with an analysis in a stochastic environment under uncertainty where the interpretive KPVs following normal distribution, as well as their historical limits in a PERT distribution. Finally, we control the sensitivity in uncertainty conditions using Monde Carlo simulations and examine the results under deterministic confidence and stochastic uncertainty. Our paper concludes that business plans following AFN economic models is a worthy tool for financial planning of SMBs in order to control their performance, contributing to budgeting and decision making for SMBs strategic planning. With this paper we contribute to debate regarding the introduction economic modeling approaches under certainty and uncertainty in the banking industry.

KEYWORDS

Bank performance; AFN models; Operation Research

jel CLASSIFICATION codes

G21; M41; C44