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American Economic Review: Vol. 102 No. 3 (May 2012)

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

Article Citation

Acharya, Viral, Robert Engle, and Matthew Richardson. 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks." American Economic Review, 102(3): 59-64.

DOI: 10.1257/aer.102.3.59

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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Authors

Acharya, Viral (NYU)
Engle, Robert (NYU)
Richardson, Matthew (NYU)

JEL Classifications

D81: Criteria for Decision-Making under Risk and Uncertainty
L51: Economics of Regulation
G01: Financial Crises
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G28: Financial Institutions and Services: Government Policy and Regulation


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