Measuring the Capital Shortfall of Large U.S. Banks

57 Pages Posted: 20 Feb 2018 Last revised: 16 Apr 2019

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: April 13, 2019

Abstract

We develop a methodology to measure the capital shortfall of commercial banks in a market downturn, which we call stressed expected loss (SEL). We simulate a market downturn as a negative shock on interest rate and credit market risk factors that reflect the banks’ market-sensitive assets. We measure SEL as the difference between the mark-to-market value of the assets in the downturn and the book value of the liabilities. Based on large U.S. commercial banks, we empirically demonstrate that individual SEL predicts the loss of capital projected by banks in a severely adverse scenario and that aggregate SEL predicts macroeconomic variables.

Keywords: Systemic Risk, Capital Shortfall, Stress Test, Multifactor Model

JEL Classification: C32, G01, G21, G28, G32

Suggested Citation

Jondeau, Eric and Khalilzadeh, Amir, Measuring the Capital Shortfall of Large U.S. Banks (April 13, 2019). 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 )

UNIL Chamberonne
Ext 248
1015 Lausanne, CH-1015
Switzerland

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