SRISK: A Conditional Capital Shortfall Measure of Systemic Risk

We introduce SRISK to measure the systemic risk contribution of a financial firm. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk. We use the measure to study top financial institutions in the recent financial crisis. SRISK delivers useful rankings of systemic institutions at various stages of the crisis and identifies Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns, and Lehman Brothers as top contributors as early as 2005-Q1. Moreover, aggregate SRISK provides early warning signals of distress in indicators of real activity.Received June 7, 2011; accepted April 18, 2016 by Editor Geert Bekaert.

[1]  R. Engle,et al.  Structural GARCH: The Volatility-Leverage Connection , 2016 .

[2]  Christophe Hurlin,et al.  Where the Risks Lie: A Survey on Systemic Risk , 2015 .

[3]  Jin-Chuan Duan,et al.  Non-Gaussian Bridge Sampling with an Application , 2015 .

[4]  M. Dempster.  The Bankers’ New Clothes, What’s Wrong with Banking and What to Do about It , 2015 .

[5]  Stefano Giglio,et al.  Systemic Risk and the Macroeconomy: An Empirical Evaluation , 2015 .

[6]  Kevin R. James,et al.  Model Risk of Risk Models , 2014 .

[7]  R. Tetlow,et al.  Financial Stress and Economic Dynamics: The Transmission of Crises , 2012, SSRN Electronic Journal.

[8]  Nikolaus Hautsch,et al.  Financial Network Systemic Risk Contributions , 2013 .

[9]  Xin Zhang,et al.  Conditional Euro Area Sovereign Default Risk , 2013 .

[10]  R. Engle,et al.  Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights , 2013 .

[11]  Anat R. Admati,et al.  The Bankers’ New Clothes , 2023 .

[12]  Turan G. Bali,et al.  Does Systemic Risk in the Financial Sector Predict Future Economic Downturns? , 2012 .

[13]  Robert F. Engle,et al.  Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks † , 2012 .

[14]  A. Lo,et al.  A Survey of Systemic Risk Analytics , 2012 .

[15]  Alan M. Taylor,et al.  When Credit Bites Back , 2013 .

[16]  A. Lo,et al.  Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors , 2011 .

[17]  F. Diebold,et al.  UNIVERSITY OF SOUTHERN CALIFORNIA Center for Applied Financial Economics (CAFE) On the Network Topology of Variance Decompositions: Measuring the Connectedness of Financial Firms , 2011 .

[18]  Markus K. Brunnermeier,et al.  Federal Reserve Bank of New York , 2009 .

[19]  Anil Shivdasani,et al.  Assessing TARP , 2011 .

[20]  Andrew Ang,et al.  Systemic Sovereign Credit Risk: Lessons from the U.S. and Europe , 2011 .

[21]  Xin Huang,et al.  Systemic Risk Contributions , 2010, Journal of Financial Services Research.

[22]  D. Scharfstein,et al.  Bank Lending During the Financial Crisis of 2008 , 2009 .

[23]  R. Engle,et al.  Anticipating Correlations: A New Paradigm for Risk Management , 2009 .

[24]  R. C. Merton,et al.  New Framework for Measuring and Managing Macrofinancial Risk and Financial Stability , 2007 .

[25]  S. Straetmans,et al.  Banking System Stability , 2007 .

[26]  Andrew J. Patton.  Modelling Asymmetric Exchange Rate Dependence , 2006 .

[27]  Stefan Straetmans,et al.  Banking System Stability: A Cross-Atlantic Perspective , 2005, SSRN Electronic Journal.

[28]  Alfred Lehar.  Measuring Systemic Risk: A Risk Management Approach , 2005 .

[29]  J. Córdoba,et al.  Credit Cycles , 2003 .

[30]  Andrew J. Patton.  (IAM Series No 001) On the Out-Of-Sample Importance of Skewness and Asymetric Dependence for Asset Allocation , 2002 .

[31]  L. Pedersen,et al.  Measuring Systemic Risk , 2010 .

[32]  R. Reis,et al.  Costs of Banking System Instability: Some Empirical Evidence , 2001 .

[33]  P. Hartmann,et al.  Systemic Risk: A Survey , 2000, SSRN Electronic Journal.

[34]  J. Duan.  MAXIMUM LIKELIHOOD ESTIMATION USING PRICE DATA OF THE DERIVATIVE CONTRACT , 1994 .

[35]  L. Glosten,et al.  On the Relation between the Expected Value and the Volatility of the Nominal Excess Return on Stocks , 1993 .

[36]  J. Zakoian,et al.  Threshold Arch Models and Asymmetries in Volatility , 1993 .

[37]  N. Economides.  Forthcoming , 1992, English Today.

[38]  B. Bernanke,et al.  Agency Costs, Net Worth, and Business Fluctuations , 1988 .

[39]  W. Newey,et al.  A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelationconsistent Covariance Matrix , 1986 .