Merton Model and Capital Measurement in Commercial Banks: A Case Study of Selected Emerging Countries in Southeast Asia
Mohammadreza Janvisloo Alizadeh () and
Reza Sherafatian-Jahromi ()
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Mohammadreza Janvisloo Alizadeh: Tejarat Bank
Reza Sherafatian-Jahromi: Allameh Tabatabai University
Asia-Pacific Financial Markets, 2017, vol. 24, issue 3, 169-191
Abstract Following the implementation of Basel III criteria concerning the supervision of banks capital, this paper attempts to examine the competence of Merton-type probability of default as an indicator for measuring optimal capital in commercial banks of five Southeast Asian emerging economies. The estimated default risk changes are consistent with the changes in market value of banks’ asset in countries studied. Using a forward-looking approach, the banks required capital has been measured to reach a hypothetical level of probability of default as an accepted level by policy makers. Empirical results show that the banks had to increase their current capital in order to reduce the risk of bankruptcy in crisis times. The findings of this study refer evidently to the efficiency of Merton-type default risk to estimate the adequate capital and to use in micro and macro-prudential studies or stress tests on commercial banks.
Keywords: Merton model; Default risk; Commercial banks; Adequate capital (search for similar items in EconPapers)
JEL-codes: G13 G17 G21 G32 (search for similar items in EconPapers)
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