Faculty News

In a letter to the editor, Profs Viral Acharya and Robert Engle discuss their research on banking stress tests

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Excerpt from Financial Times -- "In the adverse scenario of the ECB stress tests, capital adequacy is 5.5 per cent of risk-weighted assets while our measure is 5.5 per cent of total quasi assets. When risk weights do not adequately reflect risk, which has been widely observed for both European and US financial reports, then this measure of capital adequacy can be highly misleading. In an earlier study, Acharya, Engle and Pierret ('Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights', Journal of Monetary Economics, 2014), we found that risk weights were negatively related to conventional measures of firm risk."

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