Where the Risks Lie: A Survey on Systemic Risk

Abstract

We review the extensive literature on systemic risk and connect it to the current regulatory debate. While we take stock of the achievements of this rapidly growing field, we identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure

The information in systemic risk rankings

“…We interact the beta coefficient with a measure of total size for two reasons. First, it can be shown that MES (our second measure) is an affine function of the CAPM beta (see Section 5 in Benoit et al (2015)) if a single factor model describes asset returns. By interacting a beta coefficient with size we break this (trivial) link.…”

“…Our sample of listed financial sector firms contains commercial banks, insurers, asset managers, and broker/dealers. In terms of ranking methodologies, we consider risk rankings based on criteria such as SRISK (Acharya, Engle, and Richardson, 2012;Brown-lees and Engle, 2015), MES (Acharya, Pedersen, Philippon, and Richardson, 2010), the leverage ratio (Fostel and Geanakoplos, 2008;IMF, 2009;Geanakoplos and Pedersen, 2014), systematic risk defined as the so-called CAPM beta times market capitalization (Benoit, Colliard, Hurlin, and Pérignon, 2015), ∆CoVaR (Adrian and Brunnermeier, 2014;Castro and Ferrari, 2014), and firm's Value-at-Risk (Adams, Füss, and Gropp, 2014;White, Kim, and Manganelli, 2015).…”

“…Giglio et al (2015) instead follow Moreno and Pena (2013) and apply factor analysis across firms to obtain a systemic risk index in the time dimension. Benoit et al (2015) provide a theoretical and empirical survey of systemic risk measures. They demonstrate that, given a certain set of assumptions, several popular systemic risk measures can be formulated as (non-linear) functions of market risk measures such as the CAPM beta.…”

Network, Market, and Book-Based Systemic Risk Rankings

“…For example, Giglio et al (2015) compare 19 different systemic risk rankings via a principal components analysis. Interestingly, Benoit et al (2015) compare a number of these methodologies in a simplified analytical framework. They show that under specific conditions the Marginal Expected Shortfall (MES) of a firm as introduced by Acharya et al (2010) is proportional to its beta multiplied by the expected shortfall of the market.…”

“…Systemic risk allocation has, for example, been embedded into formal regulation by labeling some financials as Systemically Important Financial Institutions (SIFIs) subject to increased capital requirements. Different methods have been put forward to distinguish SIFIs from non-SIFIs using so-called systemic risk rankings; see Benoit et al (2015) for a recent survey. Most of these ranking methodologies make use of readily available data and simple statistical measures, such stock betas, volatilities, (tail) dependence measures, (conditional) values-at-risk, etc.…”