Working Paper

The adoption of stress testing: why the Basel capital measures were not enough

Abstract: The Basel capital adequacy ratios lost credibility with financial markets during the crisis. This paper argues that failure was the result of the reliance of the Basel standards on overstated asset values in reported equity capital. The United States? stress tests were able to assist in restoring credibility, in part because they could capture deterioration in asset values. However, whether stress tests will prove equally valuable in the next crisis is not clear. Some of the weaknesses in the Basel ratios are being addressed. Moreover, the U.S. tests? success was the result of a combination of circumstances that may not exist next time.

Keywords: Basel capital ratios; stress tests; financial crisis;

JEL Classification: E50; G01; G21; G28;

Bibliographic Information

Provider: Federal Reserve Bank of Atlanta

Part of Series: FRB Atlanta Working Paper

Publication Date: 2013-12-01

Number: 2013-14

Pages: 21 pages