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The adoption of stress testing: why the Basel capital measures were not enough

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  • Wall, Larry D.

    () (Federal Reserve Bank of Atlanta)

Abstract

The Basel capital adequacy ratios lost credibility with financial markets during the crisis. This paper argues that failure was the result of the reliance of the Basel standards on overstated asset values in reported equity capital. The United States’ stress tests were able to assist in restoring credibility, in part because they could capture deterioration in asset values. However, whether stress tests will prove equally valuable in the next crisis is not clear. Some of the weaknesses in the Basel ratios are being addressed. Moreover, the U.S. tests’ success was the result of a combination of circumstances that may not exist next time.

Suggested Citation

  • Wall, Larry D., 2013. "The adoption of stress testing: why the Basel capital measures were not enough," FRB Atlanta Working Paper 2013-14, Federal Reserve Bank of Atlanta.
  • Handle: RePEc:fip:fedawp:2013-14
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    Cited by:

    1. Pierluigi Bologna & Anatoli Segura, 2016. "Integrating stress tests within the Basel III capital framework: a macroprudentially coherent approach," Questioni di Economia e Finanza (Occasional Papers) 360, Bank of Italy, Economic Research and International Relations Area.
    2. Bertrand Candelon & Amadou N Sy, 2015. "How Did Markets React to Stress Tests?," IMF Working Papers 15/75, International Monetary Fund.
    3. Wall, Larry, 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.

    More about this item

    Keywords

    Basel capital ratios; stress test; financial crisis;

    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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