Measuring and stress-testing market-implied bank capital

57 Pages Posted: 2 Feb 2022 Last revised: 9 Feb 2022

See all articles by Andreas Fuster

Andreas Fuster

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Eric Jondeau

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

Martin Indergand

Swiss National Bank - Financial Stability

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2022

Abstract

We propose a methodology for measuring the market-implied capital of banks by subtracting from the market value of equity (market capitalization) a credit spread-based correction for the value of shareholders’ default option. We show that without such a correction, the estimated impact of a severe market downturn is systematically distorted, underestimating the risk of banks with low market capitalization. We argue that this adjusted measure of capital is the relevant market-implied capital measure for policymakers. We propose an econometric model for the combined simulation of equity prices and CDS spreads, which allows us to introduce this correction in the SRISK framework for measuring systemic risk.

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

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

Suggested Citation

Fuster, Andreas and Jondeau, Eric and Indergand, Martin, Measuring and stress-testing market-implied bank capital (February 1, 2022). Swiss National Bank Working Paper No. 2/2022, Available at SSRN: https://ssrn.com/abstract=4023592 or http://dx.doi.org/10.2139/ssrn.4023592

Andreas Fuster

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Bâtiment Extranef
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

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

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Eric Jondeau

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://people.unil.ch/ericjondeau/

Swiss Finance Institute ( email )

40, Boulevard du Pont-d'Arve
40, Bd du Pont-d'Arve
1211 Geneva 4, CH-6900
Switzerland
+41 21 692 33 49 (Phone)

Swiss Finance Institute

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

Martin Indergand (Contact Author)

Swiss National Bank - Financial Stability ( email )

Boersenstrasse 15
Zurich, CH-8022
Switzerland

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