Document Type
Other
Publisher
Edith Cowan University
Place of Publication
Joondalup, Western Australia
Faculty
Faculty of Business and Law
School
School of Accounting, Finance and Economics
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.
Comments
Powell, R., & Allen, D. (2010). Credit risk and real capital : an examination of Swiss Banking sector default risk using CVaR. Joondalup, Australia: Edith Cowan University.