Banks ill-prepared for Great Depression-like events, risk massive capital shortfalls.
The article explores how banks can handle credit risk during severe economic downturns like the Great Depression. By analyzing historical data and different liquidity levels, the researchers found that banking regulations usually ensure enough capital to survive such crises, except for portfolios with long-term investments. They also discovered that the capital needed to cover market risk losses in stressful situations can be much higher than expected, sometimes over twenty times more.