Measuring Systemic Risk: Capital Shortfall and CSRISK*

• Published date: 01 March 2021
• Author: Jying‐Nan Wang,Yuan‐Teng Hsu,Joe‐Ming Lee,Chih‐Chun Chen
• Date: 01 March 2021
• DOI: http://doi.org/10.1111/irfi.12269

Measuring Systemic Risk: Capital

Shortfall and CSRISK*

JYING-NAN WANG

†,‡

,YUAN-TENG HSU

§

,JOE-MING LEE

¶

AND

CHIH-CHUN CHEN

k

†

College of International Finance and Trade, Zhejiang Yuexiu University of Foreign

Languages, Zhejiang, China

‡

Research Institute for Modern Economics and Management, Zhejiang Yuexiu

University of Foreign Languages, Zhejiang, China

§

Research Center of Finance, Shanghai Business School, Shanghai, China

¶

Department of Applied Economics, Fo Guang University, Taiwan and

k

Department of Applied Economics and Management, National Ilan University,

Taiwan

ABSTRACT

This study proposes a new measure of systemic risk named CSRISK, which

identifies a financial institution’s capital shortfall under the worst scenario

conditional on a substantial market decline. The CSRISK index requires only

public financial data, including accounting and market trading information,

which is time and cost effective. The empirical sample consists of 238 US

banks over the time period 2003–2013. Overall, we find that it is increasing

from 2004 to 2009 and then starts to slightly decrease. This systemic risk

measure has the potential to be widely applied in the practical aspects of risk

management and macroprudential policy making.

JEL Codes: G18; G20; C20

Accepted: 30 March 2019

I. INTRODUCTION

In the recent surveys of Bisias et al. (2012), quantitative measures of systemic

risk are categorized and contrasted in the literature of economics and finance.

1

Systematic risk generally represents macroeconomic or market risks induced by

* The authors would like to express their sincere appreciation to the editor and the anonymous ref-

erees for their valuable comments and suggestions. All authors contributed equally to this

manuscript.

1 One of the approaches is to measure co-dependence in the tails of individual firms and the

whole economy. Adrian and Brunnermeier (2016) propose the CoVaR to measure systemic

risk with the spillover effects from individual equities to the whole economy; Acharya et al.

(2010) use the systemic expected shortfall to capture the downside risk when the whole mar-

ket is in crisis. Other recent studies related to systemic risk include, for example, contingent

claims analysis (Kritzman and Li 2010), granger-causality network model (Boyson et al. 2010;

Bisias et al. 2012), and stress tests (Alfaro and Drehmann 2009; Duffie 2013).

© 2019 International Review of Finance Ltd. 2019

International Review of Finance, 21:1, 2021: pp. 358–369

DOI: 10.1111/irfi.12269