How much capital and liquidity does a bank need – to support its risk taking activities? During the recent (and still ongoing) financial crisis, answers to this question using standard approaches, e.g. regulatory capital ratios, were no longer credible, and thus broad-based supervisory stress...

A defining difference of macro-style stress testing is the explicit consideration of profitability dynamics in the stress scenario. Traditional stress testing had focused almost exclusively on losses only, but a complete assessment of capital adequacy under stress must take into account not just...

Banks' leverage choices represent a delicate balancing act. Credit discipline argues for more leverage, while balance-sheet opacity and ease of asset substitution argue for less. Meanwhile, regulatory safety nets promote ex post financial stability, but also create perverse incentives for banks...