Measuring Equity Capital for Stress -- Testing Large Financial Institutions
36 Pages Posted: 20 Jan 2014
Date Written: December 19, 2013
The Dodd-Frank Act seeks to assure financial stability in part by mandating periodic stress tests for large and systemically important financial institutions. Appropriately, the legislation leaves implementation issues to regulatory staff, including choice of the standard for assessing whether individual institutions "pass" the stress tests. This paper recommends that stress test results be evaluated in terms of a narrow definition of equity capital that includes all available fair value adjustments. Simultaneous stress tests for important financial institutions can help supervisors determine the fair value of intangible and off-balance-sheet assets and liabilities, which are typically excluded from capital measures.
Keywords: stress tests, capital adequacy
JEL Classification: G38
Suggested Citation: Suggested Citation