Abstract
This chapter illustrates an analysis of banking loan portfolio credit risk. The objective is to select the optimal loan portfolio that achieves the bank's investment objectives with an acceptable credit risk according to their predefined limits. Stochastic optimization constructs an efficient frontier of optimal loan portfolios in banking with maximal profit and minimizing loan losses (i.e., the credit risk). Simulation stochastically calculates and measures the gross profit and the objective profit. Also, the bank regulation limits are applied based on the bank's capital to control the maximum loan amount per loan investment grade. This analysis allows for the selection of the best efficient frontier loan portfolio which gains the maximum profit.
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