Measuring the Capital Shortfall of Large U.S. Banks
69 Pages Posted: 20 Feb 2018 Last revised: 27 Feb 2018
Date Written: February 20, 2018
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
JEL Classification: C32, G01, G21, G28, G32
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