A Systematic Approach to Measures of Systemic Risk
James Ming Chen
Michigan State University - College of Law
June 29, 2014
MSU Legal Studies Research Paper No. 12-13
The failure of individual firms in the banking industry poses a unique threat to the entire economy. Emerging wisdom on systemic risk has identified two shortcomings in traditional regulatory approaches, all of which failed to anticipate the financial crisis of 2008-09. First, static measures of firm size, designed to identify institutions "too big to fail," fall short of detecting the contributions of correlation and interconnectedness to systemically significant bank failures. Second, traditional regulatory emphasis on capital adequacy has sought to guide the management of expected risks by individual banks under ordinary conditions, at the expense of anticipating the collective reaction of the banking industry to extreme stress. This anthology summarizes work toward a rigorous, systematic understanding of measures of systemic risk.
Number of Pages in PDF File: 6
Keywords: Systemic risk, banking, VaR, financial crisisAccepted Paper Series
Date posted: June 30, 2014 ; Last revised: July 12, 2014
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