Capital adequacy tests and limited liability of financial institutions

The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate the class of surplus-invariant acceptance sets. We argue that surplus invariance is a reasonable requirement from a regulatory pers...

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Bibliographic Details
Published inJournal of banking & finance Vol. 51; pp. 93 - 102
Main Authors Koch-Medina, Pablo, Moreno-Bromberg, Santiago, Munari, Cosimo
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.02.2015
Elsevier Sequoia S.A
Subjects
Capital adequacy
Capital requirements
Financial institutions
Financial services
Liability
Limited liability
Regulation
Regulation of financial institutions
Risk
Risk assessment
Risk measures
Stockholders
Studies
Surplus invariance
G11
G22
Surplus invariance
Capital adequacy
C60
Limited liability
Risk measures
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Summary:The theory of acceptance sets and their associated risk measures plays a key role in the design of capital adequacy tests. The objective of this paper is to investigate the class of surplus-invariant acceptance sets. We argue that surplus invariance is a reasonable requirement from a regulatory perspective, since the corresponding capital adequacy tests do not depend on the surplus of a financial institution, which benefits exclusively its shareholders, but only on the default profile, which affects its liability holders. We provide a detailed analysis of surplus-invariant acceptance sets and their associated risk measures and we discuss the link with loss-based and excess-invariant risk measures, recently studied by Cont et al. (2013) and by Staum (2013), respectively.
Bibliography:ObjectType-Article-1
SourceType-Scholarly Journals-1
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ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2014.11.002