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Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks

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  • Viral Acharya
  • Robert Engle
  • Matthew Richardson

Abstract

The financial crisis of 2007-2009 has given way to the sovereign debt crisis of 2010-2012, yet many of the banking issues remain the same. We discuss a method to estimate the capital that a financial firm would need to raise if we have another financial crisis. This measure of capital shortfall is based on publicly available information but is conceptually similar to the stress tests conducted by US and European regulators. We argue that this measure summarizes the major characteristics of systemic risk and provides a reliable interpretation of the past and current financial crises.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.102.3.59
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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 102 (2012)
Issue (Month): 3 (May)
Pages: 59-64

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Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:59-64

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Cited by:
  1. Bank for International Settlements, 2012. "Operationalising the selection and application of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 48.
  2. Mardi Dungey & Matteo Luciani & David Veredas, 2012. "Ranking Systemically Important Financial Institutions," CAMA Working Papers 2012-47, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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