Abstract

In this paper, we develop a new capital adequacy buffer model (CABM) which is sensitive to dynamic economic circumstances. The model, which measures additional bank capital required to compensate for fluctuating credit risk, is a novel combination of the Merton structural model which measures distance to default and the timeless capital asset pricing model (CAPM) which measures additional returns to compensate for additional share price risk.

Additional Metadata
Keywords credit risk, capital buffer, distance to default, conditional value at risk, capital adequacy buffer model
JEL Financial Crises (jel G01), Banks; Other Depository Institutions; Mortgages (jel G21), Government Policy and Regulation (jel G28)
Publisher Tinbergen Institute
Persistent URL hdl.handle.net/1765/50286
Series Tinbergen Institute Discussion Paper Series
Journal Tinbergen Institute Discussion Paper Series
Citation
Allen, D.E, McAleer, M.J, Powell, R.J, & Singh, A.K. (2013). A Capital Adequacy Buffer Model (No. TI 13-168/III). Tinbergen Institute Discussion Paper Series (pp. 1–18). Tinbergen Institute. Retrieved from http://hdl.handle.net/1765/50286