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Merton Model and Capital Measurement in Commercial Banks: A Case Study of Selected Emerging Countries in Southeast Asia

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  • Mohammadreza Janvisloo Alizadeh

    (Tejarat Bank)

  • Reza Sherafatian-Jahromi

    (Allameh Tabatabai University)

Abstract

Following the implementation of Basel III criteria concerning the supervision of banks capital, this paper attempts to examine the competence of Merton-type probability of default as an indicator for measuring optimal capital in commercial banks of five Southeast Asian emerging economies. The estimated default risk changes are consistent with the changes in market value of banks’ asset in countries studied. Using a forward-looking approach, the banks required capital has been measured to reach a hypothetical level of probability of default as an accepted level by policy makers. Empirical results show that the banks had to increase their current capital in order to reduce the risk of bankruptcy in crisis times. The findings of this study refer evidently to the efficiency of Merton-type default risk to estimate the adequate capital and to use in micro and macro-prudential studies or stress tests on commercial banks.

Suggested Citation

  • Mohammadreza Janvisloo Alizadeh & Reza Sherafatian-Jahromi, 2017. "Merton Model and Capital Measurement in Commercial Banks: A Case Study of Selected Emerging Countries in Southeast Asia," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 24(3), pages 169-191, September.
    • Handle: RePEc:kap:apfinm:v:24:y:2017:i:3:d:10.1007_s10690-017-9229-y
    DOI: 10.1007/s10690-017-9229-y
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    More about this item

    Keywords

    Merton model; Default risk; Commercial banks; Adequate capital;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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