74 Pages Posted: 28 Sep 2013 Last revised: 23 Mar 2017
Date Written: March 22, 2017
We identify several shortcomings in the systemic-risk scoring methodology currently used to identify and regulate Systemically Important Financial Institutions (SIFIs). Using newly-disclosed regulatory data for 119 US and international banks, we show that the current scoring methodology severely distorts the allocation of regulatory capital among banks. We then propose and implement a methodology that corrects for these short-comings and increases incentives for banks to reduce their risk contributions. Unlike the current scores, our adjusted scores are mainly driven by risk indicators directly under the control of the regulated bank and not by factors that are exogenous to the bank, such as exchange rates or other banks' actions.
Keywords: G-SIFI, regulatory capital, Basel Committee
JEL Classification: G21
Suggested Citation: Suggested Citation
Benoit, Sylvain and Hurlin, Christophe and Perignon, Christophe, Pitfalls in Systemic-Risk Scoring (March 22, 2017). HEC Paris Research Paper No. FIN-2013-1005. Available at SSRN: https://ssrn.com/abstract=2332030 or http://dx.doi.org/10.2139/ssrn.2332030
By James Chen