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Measuring the Capital Shortfall of Large U.S. Banks

Author

Listed:
  • Eric Jondeau

    (University of Lausanne and Swiss Finance Institute)

  • Amir Khalilzadeh

    (University of Lausanne)

Abstract

We develop a new methodology to measure the capital shortfall of commercial banks during a market downturn. The measure, which we call stressed expected loss (SEL), adopts the structure of the individual bank's balance sheet. SEL is defined as the difference between the market value of assets in the stress scenario and the book value of the deposits and short-term debt of the bank. We estimate the probability of default and the SEL of the 31 largest commercial banks in the U.S. between 1996 and 2016. The probability of default in a market downturn was as high as 25%, on average, between 2008 and 2012. It is now much lower and close to 5%, on average. SEL was very high (between $250 and $350 billion) during the subprime crisis. In 2016, it is close to $200 billion.

Suggested Citation

  • Eric Jondeau & Amir Khalilzadeh, 2018. "Measuring the Capital Shortfall of Large U.S. Banks," Swiss Finance Institute Research Paper Series 18-11, Swiss Finance Institute, revised Feb 2018.
    • Handle: RePEc:chf:rpseri:rp1811
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    More about this item

    Keywords

    Systemic Risk; Capital Shortfall; Stress Test; Multi-factor Model;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • 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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