Pitfalls in Systemic-Risk Scoring

Mardi | 2017-01-10
16h00-17h20 sully 05

Christophe HURLIN – Sylvain BENOIT – Christophe PERIGNON

We identify two main shortcomings in the systemic-risk scoring methodology currently used to identify and regulate Systemically Important Financial Institutions (SIFIs). Using newly-disclosed regulatory data for 119 US and international banks, we show that the economic magnitude of the resulting bias turns out to be important. The banks that benefit the most from the bias are custodian banks and (non-) Eurozone banks when the Euro weakens (strengthens). We then propose and implement a modified methodology that corrects for these shortcomings and leads to different conclusions about the banks that contribute the most to the risk of the system.