SRISK: A Conditional Capital Shortfall Index for Systemic Risk Measurement
Christian T. Brownlees
Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE)
Robert F. Engle
New York University - Leonard N. Stern School of Business - Department of Economics; New York University (NYU) - Department of Finance; National Bureau of Economic Research (NBER)
January 1, 2015
This paper introduces the SRISK index to measure the systemic risk contribution of a financial firm. The index associates systemic risk to the capital shortfall a financial institution is expected to experience conditional on a severe market decline. SRISK is a function of the firm's size, its degree of leverage and its expected equity loss conditional on a market downturn. The sum of SRISK across all firms is used to measure the degree of undercapitalization of the whole financial system. We use SRISK to analyze the systemic risk of top US financial firms between January 2005 and December 2012, with a focus on the financial crisis. Results show that the methodology provides useful rankings of systemically risky firms at various stages of the crisis. In particular, SRISK rankings identify Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns and Lehman Brothers as top systemic contributors as early as 2005-Q1. Moreover, we show that pre-crisis SRISK is a significant predictor of the capital injection received by the Fed during the crisis, and that an increase in aggregate SRISK is an early warning signal of a drop in industrial production and a hike in the unemployment rate.
Number of Pages in PDF File: 45
Keywords: Systemic Risk Measurement, Forecasting
JEL Classification: C22, C23, C53, G01, G20
Date posted: May 18, 2010 ; Last revised: January 8, 2015
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