BoE paper measures ‘market-implied’ systemic risk

Bank of England
The Bank of England
Daniel Hinge

Researchers propose a means of estimating how capital adequacy changes as default risk rises, setting out their measure of “shadow capital adequacy” in a Bank of England working paper.

Somnath Chatterjee and Andreas Jobst use a form of “contingent claims analysis”. They assess the probability of default based on the risk-adjusted balance sheet of firms. Assets move stochastically and may be “above or below promised payments” on debt obligations.

“In the context of banks, this approach

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