Document Type

Journal Article

Faculty

Faculty of Business and Law

School

School of Accounting, Finance and Economics / Finance, Economics, Markets and Accounting Research Centre

RAS ID

12926

Comments

This article was originally published as: Allen, D. E., & Powell, R. (2011). Measuring Real Capital Adequacy in Extreme Economic Conditions: An Examination of Swiss Banking Sector. Journal of Modern Accounting and Auditing , 7(6), 541-554. Original article available here

Abstract

The global financial crisis (GFC) has placed the creditworthiness of banks under intense scrutiny. In particular, capital adequacy has been called into question. Current capital requirements make no allowance for capital erosion caused by movements in the market value of assets. This paper examines default probabilities of Swiss banks under extreme conditions using structural modeling techniques. Conditional Value at Risk (CVaR) and Conditional Probability of Default (CPD) techniques are used to measure capital erosion. Significant increase in Probability of Default (PD) is found during the GFC period. The market asset value based approach indicates a much higher PD than external ratings indicate. Capital adequacy recommendations are formulated which distinguish between real and nominal capital based on asset fluctuations.

Creative Commons License

Creative Commons Attribution-Noncommercial 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial 4.0 License

 
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