This paper gives three quantitative answers to Fischer’s question “at what level should capital ratios be set?” based on (1) the FED Stress Tests 2015 (2) VLab’s Systemic Risk measures and (3) our (Craine- Martin) estimates. This paper compares Safe Capital Ratios for 18 Bank Holding Companies. The Craine-Martin (CM) implied safe capital ratios are the highest averaging 22%, followed by VLab’s averaging 16%, and the FED Stress tests the lowest at 11%. We (CM) find higher implied safe capital ratios than VLab because our specification allows losses at one bank holding company to effect the others. In a crisis accounting for the covariance among bank holding companies returns gives much large losses since their returns and asset values are positively correlated. Both CM and VLab find larger implied safe capital ratios than the Fed Stress Tests because they calculate the loss to the market value of bank equity during a crisis while the Fed stress test calculate the loss the book value of bank equity in a crisis. Book equity values don’t respond very much to a crisis—even a crisis as large as the Gt Recession—so the implied book value safe capital ratios are not as large. Paper link: http://eml.berkeley.edu/~craine/2009/Capital%20Ratios%2001-05-16.pdf
- Start date: 2016-01-26 11:00:00
- End date: 2016-01-26 12:30:00
- Venue: 639 Evans Hall at UC Berkeley
- Address: 639 Evans Hall, Berkeley, CA, 94720