SRISK: Challenging Supervisory Bank Stress Tests and Prudential Regulation

Macro-Prudential Supervision

Today we want to highlight the NYU Stern’s Systemic Risk website, http://vlab.stern.nyu.edu/welcome/risk. Systemically important financial institutions (SIFIs) are typically defined as institutions whose failure would significantly impact the financial and the real economy. International and European regulators and supervisors set up a massive macro prudential system to manage systemic risk. Viral Acharya, Robert Engle and Matthew Richardson argue that publicly available market information can be used to estimate the capital shortfall of a financial firm if a financial crisis occurs. After describing the method to calculate the SRISK measure they show that the method could also serve for the determination of bank individual prudential capital requirements, based on the risk profile of the respective businesses.

SRISK is conceptually similar to the stress tests conducted by US and European regulators: “Expected capital shortfall captures in a single measure many of the characteristics considered important for systemic risk such as size, leverage, and interconnectedness. All of these characteristics tend to increase a firm’s capital…

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