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Capital cyclicality, conditional coverage and long-term capital assessment

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  • Ferrer, Alex
  • Casals, José
  • Sotoca, Sonia

Abstract

We address credit capital cyclicality from a different point of view with the objective of defining alternative measures of long-term capital solvency. We first define the conditional coverage vector, which results from keeping capital constant and let conditional coverage evolve with the economy. We show that its average equals the corresponding unconditional coverage, which motivates us to propose to use its minimum and standard deviation as long-term measures of solvency resilience and stability. We also conduct an empirical analysis. The results show the influence of the Great Recession on the conditional coverage vector and its long-term solvency discrimination power.

Suggested Citation

  • Ferrer, Alex & Casals, José & Sotoca, Sonia, 2015. "Capital cyclicality, conditional coverage and long-term capital assessment," Finance Research Letters, Elsevier, vol. 15(C), pages 246-256.
  • Handle: RePEc:eee:finlet:v:15:y:2015:i:c:p:246-256
    DOI: 10.1016/j.frl.2015.10.009
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    More about this item

    Keywords

    Capital assessment; Capital cyclicality; Charge-off; Conditional coverage; Credit risk; Unconditional capital;

    JEL classification:

    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • 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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