Predicting the stressed expected loss of large U.S. banks

Eric Jondeau and Amir Khalilzadeh

Journal of Banking & Finance, 2022, vol. 134, issue C

Abstract: We develop a methodology to measure the expected loss of commercial banks in a market downturn, which we call stressed expected loss (SEL). We simulate a market downturn as a negative shock on interest rate and credit market risk factors that reflect the banks’ market-sensitive assets. We measure SEL as the difference between the mark-to-market value of the assets in the downturn and the book value of the liabilities. Based on large U.S. commercial banks, we empirically demonstrate that individual SEL predicts the loss of capital projected by banks in a severely adverse scenario and that aggregate SEL predicts macroeconomic variables.

Keywords: Systemic risk; Capital shortfall; Stress test; Multifactor model (search for similar items in EconPapers)
JEL-codes: C32 G01 G21 G28 G32 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:134:y:2022:i:c:s0378426621002727

DOI: 10.1016/j.jbankfin.2021.106321

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