Bank Economic Capital
This research introduces a framework for bank economic capital by integrating asset-liability valuations, deposit behavior, liquidity, and risk exposures.
What it examines
This study develops a novel method to measure bank economic capital by calculating the present value of assets, liabilities, and required expenses using public regulatory data. It integrates credit, interest rate, and funding risks to assess bank solvency and predict failure risk more accurately.
What it concludes
The results show that traditional capital measures can overstate bank strength, while the new approach identifies vulnerable banks more reliably, especially under deposit-run conditions. Potential applications include stress testing, regulatory monitoring, and improved risk management, with further research needed for finer data details.
Evidence objects
The report introduces a measure, economic capital (EC), that integrates credit, market, liquidity, and funding risks by evaluating present values of assets, liabilities, and operational expenses for risk assessment globally.
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Researchers reveal that traditional capital ratios, including tangible common equity (TCE), fail to predict bank distress, while the run economic capital (R-EC) metric accurately flags vulnerable banks years ahead notably.
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The study emphasizes deposit composition and prepayment dynamics, employing novel methodologies like dynamic discounting with risk-neutral yields and forward rate adjustments, yet acknowledges reliance on regulatory data and risk limitations.
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This paper introduces a groundbreaking strategy in Quantitative Risk Management through a holistic integration of credit, liquidity, and market risks. It innovatively bridges standard accounting with market valuations by incorporating depositor behavior and asset adjustments, offering a fresh, impactful framework that significantly advances regulatory practices and enhances bank capital management.
key_findings bullet 4 · key_findings · validation V0
Raw abstract and provenance
- … This allows us to jointly assesses credit and liquidity risks in addition to market risks… market value estimates are not much better at identifying unanticipated shocks to credit …
Source row: 280 · abstract type: snippet