Event Date Details:
Refreshments served at 4:45 p.m.
- Sobel Seminar Room; South Hall 5607F
- CFMAR Seminar Series
Abstract: Systemic risk refers to the risk that the financial system is susceptible to failures due to the characteristics of the system itself. The tremendous cost of this type of risk requires the design and implementation of tools for the efficient macroprudential regulation of financial institutions. In this talk we will discuss a novel approach to measuring systemic risk.
To measure the risk of the financial system, we express systemic risk in terms of the necessary capital endowments of the financial firms to reach some macroprudential objective. This definition requires two ingredients: first, a cash flow or value model that assigns to the capital allocations of the entities in the system a relevant stochastic outcome. The second ingredient is an acceptability criterion, i.e. a set of random variables that identifies the outcomes that are acceptable from the point of view of a regulatory authority. Systemic risk is measured by the set of allocations of additional capital that lead to acceptable outcomes. We explain the conceptual framework and the definition of systemic risk measures, provide an algorithm for their computation, and illustrate their application in numerical case studies.