How Much SRISK Is Too Much?

50 Pages Posted: 9 Feb 2018 Last revised: 4 Oct 2018

See all articles by Robert F. Engle

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)

Tianyue Ruan

National University of Singapore (NUS) - Department of Finance

Date Written: September 27, 2018

Abstract

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

Engle, Robert F. and Ruan, Tianyue, How Much SRISK Is Too Much? (September 27, 2018). Available at SSRN: https://ssrn.com/abstract=3108269 or http://dx.doi.org/10.2139/ssrn.3108269

Robert F. Engle

New York University - Leonard N. Stern School of Business - Department of Economics ( email )

269 Mercer Street
New York, NY 10003
United States

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Tianyue Ruan (Contact Author)

National University of Singapore (NUS) - Department of Finance ( email )

Mochtar Riady Building
15 Kent Ridge Drive
Singapore, 119245
Singapore

HOME PAGE: http://https://truan.github.io/

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