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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.

Suggested Citation

  • Viral Acharya & Robert Engle & Matthew Richardson, 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks," American Economic Review, American Economic Association, vol. 102(3), pages 59-64, May.
  • Handle: RePEc:aea:aecrev:v:102:y:2012:i:3:p:59-64
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    References listed on IDEAS

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    1. Scholes, Myron & Williams, Joseph, 1977. "Estimating betas from nonsynchronous data," Journal of Financial Economics, Elsevier, vol. 5(3), pages 309-327, December.
    2. Slovin, Myron B & Sushka, Marie E & Polonchek, John A, 1993. " The Value of Bank Durability: Borrowers as Bank Stakeholders," Journal of Finance, American Finance Association, vol. 48(1), pages 247-266, March.
    3. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June.
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