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Capital adequacy tests and limited liability of financial institutions


Koch-Medina, Pablo; Moreno, Santiago; Munari, Cosimo-Andrea (2015). Capital adequacy tests and limited liability of financial institutions. Journal of Banking and Finance, 51:93-102.

Abstract

The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate the class of surplus-invariant acceptance sets. We argue that surplus invariance is a reasonable requirement from a regulatory perspective, since the corresponding capital adequacy tests do not depend on the surplus of a financial institution, which benefits exclusively its shareholders, but only on the default profile, which affects its liability holders. We provide a detailed analysis of surplus-invariant acceptance sets and their associated risk measures and we discuss the link with loss-based and excess-invariant risk measures, recently studied by Cont et al. (2013) and by Staum (2013), respectively.

Abstract

The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate the class of surplus-invariant acceptance sets. We argue that surplus invariance is a reasonable requirement from a regulatory perspective, since the corresponding capital adequacy tests do not depend on the surplus of a financial institution, which benefits exclusively its shareholders, but only on the default profile, which affects its liability holders. We provide a detailed analysis of surplus-invariant acceptance sets and their associated risk measures and we discuss the link with loss-based and excess-invariant risk measures, recently studied by Cont et al. (2013) and by Staum (2013), respectively.

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Citations

2 citations in Web of Science®
2 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2015
Deposited On:27 Nov 2015 09:13
Last Modified:08 Dec 2017 15:05
Publisher:Elsevier
ISSN:0378-4266
Publisher DOI:https://doi.org/10.1016/j.jbankfin.2014.11.002
Other Identification Number:merlin-id:11660

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