Measuring and Stress-Testing Market-Implied Bank Capital

Martin Indergand, Eric Jondeau and Andreas Fuster

No 22-11, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

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.

Keywords: Banking; Capital; Stress Test; Systemic Risk; Multifactor Model (search for similar items in EconPapers)
JEL-codes: C32 G01 G21 G28 G32 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2022-01
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
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Related works:
Working Paper: Measuring and stress-testing market-implied bank capital (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2211

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