Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks
AbstractThe 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.
CitationAcharya, 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
- 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