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Conditional coverage and its role in determining and assessing long-term capital requirements

Author

Listed:
  • Alejandro Ferrer Pérez

    () (Facultad de Ciencias Económicas. Universidad Complutense de Madrid.)

  • José Casals Carro

    (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.)

  • Sonia Sotoca López

    () (Departamento de Fundamentos del Análisis Económico II (Economía Cuantitativa). Universidad Complutense de Madrid.)

Abstract

We define the vector of conditional coverage values generated over the business cycle by a constant capital figure. Using a convenient analytical framework, we explore its properties and propose two applications based on it. For the former, we state a result that links the concepts of conditional and unconditional solvency and offers an alternative interpretation of the unconditional capital. For the latter, we propose using the minimum of the conditional coverage vector in the determination of long-term capital requirements, as well as using its minimum and its standard deviation in the long-term assessment of a given capital figure. Both applications are illustrated empirically. The entire analysis can be understood as an attempt to recognize and incorporate capital cyclicality into the measurement and analysis of default risk.

Suggested Citation

  • Alejandro Ferrer Pérez & José Casals Carro & Sonia Sotoca López, 2014. "Conditional coverage and its role in determining and assessing long-term capital requirements," Documentos de Trabajo del ICAE 2014-12, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  • Handle: RePEc:ucm:doicae:1412
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    References listed on IDEAS

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    More about this item

    Keywords

    Default risk; Long-term capital; Unconditional capital; Conditional coverage; Unconditional coverage; Capital cyclicality.;

    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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