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Measuring Real Capital Adequacy In Extreme Economic Conditions: An Examination Of Swiss Banking Sector, David E. Allen, Robert Powell
Measuring Real Capital Adequacy In Extreme Economic Conditions: An Examination Of Swiss Banking Sector, David E. Allen, Robert Powell
Research outputs 2011
The global financial crisis (GFC) has placed the creditworthiness of banks under intense scrutiny. In particular, capital adequacy has been called into question. Current capital requirements make no allowance for capital erosion caused by movements in the market value of assets. This paper examines default probabilities of Swiss banks under extreme conditions using structural modeling techniques. Conditional Value at Risk (CVaR) and Conditional Probability of Default (CPD) techniques are used to measure capital erosion. Significant increase in Probability of Default (PD) is found during the GFC period. The market asset value based approach indicates a much higher PD than external …