Template-type: ReDIF-Paper 1.0
Author-Name: Dr. Martin Indergand
Author-Name-First: Martin
Author-Name-Last: Indergand
Author-Name: Eric Jondeau
Author-Name-First: Eric
Author-Name-Last: Jondeau
Author-Name: Dr. Andreas Fuster
Author-Name-First: Andreas
Author-Name-Last: Fuster
Author-Person:  pfu92
Title: Measuring and stress-testing market-implied bank capital
Abstract: We propose a methodology for measuring the market-implied capital of banks by subtracting from the market value of equity (market capitalization) a credit spread-based correction for the value of shareholders' default option. We show that without such a correction, the estimated impact of a severe market downturn is systematically distorted, underestimating the risk of banks with low market capitalization. We argue that this adjusted measure of capital is the relevant market-implied capital measure for policymakers. We propose an econometric model for the combined simulation of equity prices and CDS spreads, which allows us to introduce this correction in the SRISK framework for measuring systemic risk.
Length: 53 pages
Creation-Date: 2022
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2022/working_paper_2022_02
File-Format: text/html
Number: 2022-02
Classification-JEL: C32, G01, G21, G28, G32
Keywords: Banking, capital, stress test, systemic risk, multifactor model
Handle: RePEc:snb:snbwpa:2022-02