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

  • Wall, Larry D.

    ()

    (Federal Reserve Bank of Atlanta)

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.

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Paper provided by Federal Reserve Bank of Atlanta in its series FRB Atlanta Working Paper No. with number 2013-14.

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Length: 21 pages
Date of creation: 01 Dec 2013
Date of revision:
Handle: RePEc:fip:fedawp:2013-14
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