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Contribution Details
| Type | Working Paper |
| Scope | Contributions to practice |
| Title | Capital Adequacy Tests and Limited Liability of Financial Institutions |
| Organization Unit | |
| Authors |
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| Language |
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| Institution | University of Zurich |
| Series Name | Swiss Finance Institute Research Paper |
| Number | 14-03 |
| Date | 2014 |
| Abstract Text | 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, in the context of bounded financial positions, the class of surplus-invariant acceptance sets. These are characterized by the fact that acceptability does not depend on the positive part, or surplus, of a capital position. We argue that surplus invariance is a reasonable requirement from a regulatory perspective, because it focuses on the interests of liability holders of a financial institution. We provide a dual characterization of surplus-invariant, convex acceptance sets, and show that the combination of surplus invariance and coherence leads to a narrow range of capital adequacy tests, essentially limited to scenario-based tests. Finally, we emphasize the advantages of dealing with surplus-invariant acceptance sets as the primary object rather than directly with risk measures, such as loss-based and excess-invariant risk measures, which have been recently studied by Cont, Deguest & He and by Staum, respectively. |
| Free access at | Official URL |
| Official URL | http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2348590 |
| Other Identification Number | merlin-id:9228 |
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