Solvency supervision based on a total balance sheet approach: Risk Measures and Solvency

In this paper we investigate the adequacy of the own funds a company requires in order to remain healthy and avoid insolvency. Two methods are applied here; the quantile regression method and the method of mixed effects models. Quantile regression is capable of providing a more complete statistical analysis of the stochastic relationship among random variables than least squares estimation. The estimated mixed effects line can be considered as an internal industry equation (norm), which explains a systematic relation between a dependent variable (such as own funds) with independent variables (e.g. financial characteristics, such as assets, provisions, etc.). The above two methods are implemented with two data sets.