Measuring the Capital Shortfall of Large U.S. Banks

Eric Jondeau and Amir Khalilzadeh
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Amir Khalilzadeh: University of Lausanne

No 18-11, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a new methodology to measure the capital shortfall of commercial banks during a market downturn. The measure, which we call stressed expected loss (SEL), adopts the structure of the individual bank's balance sheet. SEL is defined as the difference between the market value of assets in the stress scenario and the book value of the deposits and short-term debt of the bank. We estimate the probability of default and the SEL of the 31 largest commercial banks in the U.S. between 1996 and 2016. The probability of default in a market downturn was as high as 25%, on average, between 2008 and 2012. It is now much lower and close to 5%, on average. SEL was very high (between $250 and $350 billion) during the subprime crisis. In 2016, it is close to $200 billion.

Keywords: Systemic Risk; Capital Shortfall; Stress Test; Multi-factor Model (search for similar items in EconPapers)
JEL-codes: C32 G01 G21 G28 G32 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2018-02, Revised 2018-02
New Economics Papers: this item is included in nep-acc, nep-ban and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1811

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