How Much SRISK Is Too Much?
85 Pages Posted: 9 Feb 2018 Last revised: 28 Mar 2018
Date Written: March 23, 2018
When financial firms are under-capitalized, they are vulnerable to external shocks. This is commonly measured by stress tests or market-based measures of systemic risk such as SRISK. The natural response to such vulnerability is to raise capital and this can endogenously start a financial crisis. Excessive credit growth can be interpreted as under-capitalization of the financial sector. Hence, we can assess how much SRISK an economy can stand, and measure the probability of a crisis. Using a crisis intensity variable constructed by Romer and Romer (2017), we estimate a Tobit model for 23 developed economies. We develop a probability of crisis measure and an SRISK capacity measure from the Tobit estimates. These reveal the important global externalities since the risk of a crisis in one country is strongly influenced by the under-capitalization of the rest of the world.
Keywords: systemic risk, financial crisis
JEL Classification: G01, G20, G28
Suggested Citation: Suggested Citation