Any solvency regime for financial institutions should be aligned with the two fundamental objectives of regulation: protecting liability holders and securing the stability of the financial system. From these objectives we derive two normative requirements for capital adequacy tests, called surplus and num\'{e invariance, respectively. We characterize capital adequacy tests that satisfy surplus and num\'{e invariance, establish an intimate link between these requirements, and highlight an inherent tension between the ability to meet them and the desire to give credit for diversification.
Any solvency regime for financial institutions should be aligned with the two fundamental objectives of regulation: protecting liability holders and securing the stability of the financial system. From these objectives we derive two normative requirements for capital adequacy tests, called surplus and num\'eraire invariance, respectively. We characterize capital adequacy tests that satisfy surplus and num\'eraire invariance, establish an intimate link between these requirements, and highlight an inherent tension between the ability to meet them and the desire to give credit for diversification.
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num\'{e
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num\'{e
num\'eraire