Measuring Equity Capital for Stress -- Testing Large Financial Institutions

36 Pages Posted: 20 Jan 2014  

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Date Written: December 19, 2013

Abstract

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

Flannery , Mark J., Measuring Equity Capital for Stress -- Testing Large Financial Institutions (December 19, 2013). Available at SSRN: https://ssrn.com/abstract=2370104 or http://dx.doi.org/10.2139/ssrn.2370104

Mark Jeffrey Flannery (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

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