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Measuring capital adequacy: supervisory stress-tests in a Basel world

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  • Larry Wall

    (Federal Reserve Bank of Atlanta)

Abstract

The U.S. is now committed to using two relatively sophisticated approaches to measuring capital adequacy: Basel III and stress-tests. This paper shows how stress testing could mitigate weaknesses in the way Basel III measures credit and interest rate risk, the way it measures bank capital and the way it creates countercyclical capital buffers. However, the paper also emphasizes the extent to which stress-tests add value will depend upon the exercise of supervisor discretion in the design of stress scenarios. Whether supervisors will use this discretion more effectively than they have used other tools in the past remains to be seen.

Suggested Citation

  • Larry Wall, 2014. "Measuring capital adequacy: supervisory stress-tests in a Basel world," Journal of Financial Perspectives, EY Global FS Institute, vol. 2(1), pages 85-94.
    • Handle: RePEc:ris:jofipe:0039
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    Cited by:

    1. Pavel Kapinos & Oscar A. Mitnik, 2016. "A Top-down Approach to Stress-testing Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 49(2), pages 229-264, June.

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    Keywords

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    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • 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

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