A Critique of SRISK as an Alternative to Regulatory Leverage Ratio

Abstract

In the wake of the 2008 financial crisis, Robert Engle and colleagues at New York University developed the NYU Stern Systematic Risk Model (SRISK), a market-based substitute for regulatory measures of systemic risk of financial institutions. This study identifies four shortcomings of SRISK. First, market value is not an adequate substitute for book value in measuring systemic risk. Second, SRISK fails to account for credit derivatives and other off-balance sheet risk. Third, the market data captured by SRISK itself relies on regulatory disclosures. Fourth, SRISK cannot be applied to private firms.

Keywords: SRISK, systemic risk, systemically important financial institutions (SIFI), book values, market values, accounting conservatism, Basel III, supplementary leverage ratio, credit derivatives

JEL Classification: G20, G21, G22, G28, M40, M41, M48