The following is an excerpt from a recent paper written by NYU Stern Professor Viral Acharya and Sascha Steffen:
In November 2014, the ECB published its asset quality review (AQR) and comprehensive assessment (ECB 2014), as well as capital shortfall estimates based on its stress test. These results differed widely from our earlier assessment (Acharya and Steffen 2014). Indeed, the two shortfall estimates are negatively correlated.
Calculations that we have recently completed suggest that the divergence between our numbers and those of the ECB can be explained by the continued reliance on static risk-weights in the regulatory assessment. In fact, using the projected losses in the adverse scenario employed by the ECB and applying a different (non risk-weights based, i.e. simple) leverage ratio gives results much closer to ours.
We compare two measures of capital shortfall, the “regulatory shortfall measure” as used by the ECB, and SRISK as calculated by NYU Stern School of Business Volatility Lab. Both concepts are conceptually similar as they estimate losses in a stress scenario and determine the capital shortfall between a prudential capital requirement and the remaining equity after losses.
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