Click to enlarge
Source: Institute for New Economic Thinking



NYU prof Robert Engle, who long-time blog readers may recall from this post a ways back, won the Nobel prize for his work on Volatility.

He has developed new ways to measure “Systemic risk” from his perch at the Volatility Institute at NYU:

“We estimate the amount of capital that a financial institution would have to raise in order to continue to function normally if we have another financial crisis like the one in 2008. This is interpreted as a capital cushion to protect against a decline of 40% in the broad equity market over the six months after this occurs . . .
We call this measure SRISK. We compute it weekly and post it on the website systemicrisk. The estimation uses equity prices with methods that are extensions of the volatility models that formed the basis for my Nobel Prize. SRISK combines information on size, leverage, and risk to indicate how serious a default would be.

As the chart above shows, Lehman was not the only one who had engaged in too much risk taking. Indeed, they were not even the worst offender. And as the table below shows, JP Morgan now represents the greatest risk to the financial system.



Source: NYU VLAB


When we talk about risk in the system, this is what we are referring to.

Category: Bailouts, Corporate Management, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “New Measure of System Risk (circa 2008 Crisis)”

  1. Chief Tomahawk says:

    Jamie Dimon is dancing on the ceiling! (So long as the government safety net stays below…)

  2. rd says:

    The big advantage of being TBTF is that you don’t have to worry about these piddly details because you have the full faith and credit of the United States behind you. However, Congress does seem pretty determined to reduce that full faith and credit part in October, so maybe Jaie Dimon et al need to start paying more attention.

  3. [...] Chase, run by “America’s Least-Hated Banker” Jamie Dimon, “now represents the greatest risk to the financial [...]

  4. DeDude says:

    It looks like anybody who was not taken over by government is now an even bigger systemic risk than they were just before the crisis in 2008. I guess we have learned nothing.

  5. Ramstone says:

    And nearly half insurers, to remind us that AIG played more than a little part in That Drama. Ibanks may be the lightning rod, but some insurers are nearly as much of a problem. I suspect we focus on banks more because, as opaque as they are, the light is better over there.

  6. [...] mentioned NYU’s VLAB earlier, but one more trick I wanted to [...]

  7. JesseLivermore says:

    How good of a measure can it be if it identified Lehman and WaMu as 3 or 6 times safer than the banks that didn’t go under?

    • RobC says:

      The SRISK measure should not be construed as a probability measure. A firm SRISK 1/3 or 1/6 the size of another firm means that the funds needed to bail out the firm would be 1/3 or 1/6 the size.

  8. BenGraham says:

    Maybe I’m too skeptical, but why did the 3 most risky banks in 2008 not go bust early on (same time as LEH, AIG, FNM, FRE, WAMU etc) if their risk was >2x as much?

    • RobC says:

      The SRISK measure shouldn’t be construed as a probability measure. Instead, it measures the size of a bailout needed should the institution fail. High SRISK does not necessarily indicate impending failure.

  9. Frilton Miedman says:

    Discussing these details is moot when regulators are unable to do anything about it because the House & Senate are owned.

    The problem is that TBTF’s make or break political careers because bribery is free speech according to the SCOTUS, by default TBTF’s ARE the government. (As is the healthcare sector, defense contractors, private prisons, insurers…etc…etc)

  10. Ramstone says:

    They would have gone bust, if not for TARP. SRISK if I understand, doesn’t necessarily mean biggest SRISK == first to fail..

    • BenGraham says:

      All those cited went bust before TARP. You’d think the riskiest would too. If 2.5x higher SRISK doesn’t predict failure in extreme circumstances, what does it predict?

  11. Marc P says:

    I could use some help understanding how the authors determined systemic risk. There have been many reports of the enormous amount of derivatives out there — reported to be $1200 billion, far in excess of megabank net worth. Derivatives are the biggest question mark and black box on the banks’ balance sheets. How do the authors calculate the risk? How do the authors even know what these non-public-and-undisclosed contracts say? How do the authors marshal the resources to understand them?

  12. [...] of current systemic risk levels via NYU’s VLAB, see helpful posts from Barry Ritholtz here and [...]