Measuring the Capital Shortfall of Large U.S. Banks

69 Pages Posted: 20 Feb 2018 Last revised: 27 Feb 2018

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Amir Khalilzadeh

Swiss Finance Institute @ EPFL

Date Written: February 20, 2018

Abstract

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

Suggested Citation

Jondeau, Eric and Khalilzadeh, Amir, Measuring the Capital Shortfall of Large U.S. Banks (February 20, 2018). Swiss Finance Institute Research Paper No. 18-11. Available at SSRN: https://ssrn.com/abstract=3126896 or http://dx.doi.org/10.2139/ssrn.3126896

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Amir Khalilzadeh

Swiss Finance Institute @ EPFL ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

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