Capital adequacy tests and limited liability of financial institutions

Pablo Koch-Medina, Santiago Moreno-Bromberg and Cosimo Munari

Journal of Banking & Finance, 2015, vol. 51, issue C, 93-102

Abstract: The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate the class of surplus-invariant acceptance sets. We argue that surplus invariance is a reasonable requirement from a regulatory perspective, since the corresponding capital adequacy tests do not depend on the surplus of a financial institution, which benefits exclusively its shareholders, but only on the default profile, which affects its liability holders. We provide a detailed analysis of surplus-invariant acceptance sets and their associated risk measures and we discuss the link with loss-based and excess-invariant risk measures, recently studied by Cont et al. (2013) and by Staum (2013), respectively.

Keywords: Surplus invariance; Capital adequacy; Limited liability; Risk measures (search for similar items in EconPapers)
JEL-codes: C60 G11 G22 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:51:y:2015:i:c:p:93-102

DOI: 10.1016/j.jbankfin.2014.11.002

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