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Credit Risk and Real Capital: An Examination of Swiss Banking Sector Default Risk Using CVaR
Year Of Publication: 2010
Month Of Publication: October
Pages: 26
Download Count: 8
View Count: 1667
Comment Num: 0
Language: English
Source: working paper
Who Can Read: Free
Date: 3-24-2011
Publisher: Administrator
Summary
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 ratings indicate. Capital adequacy recommendations are formulated which distinguish between real and nominal capital based on asset fluctuations.
Author(s)
Powell, Robert J. Sign in to follow this author
Allen, David E. Sign in to follow this author
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