Sunday, September 22, 2019
This past week, Dr. Robert Engle, the 2003 Nobel Laureate in Economics and Michael Armellino Professor of Management and Financial Services at the NYU Stern School of Business, spoke at the University of Oklahoma in the Deane and Ginger Kanaly Lecture Series at the Michael F. Price College of Business and in our Energy and Commodities Finance Research Conference.
Engle’s Kanaly Lecture focused on the work of Stern’s Volatility Institute (V-Lab), which he directs. Specifically, he spoke at length about a measurement of systemic risk termed “SRISK.” Systemic risk is generally understood to be the risk that the collapse of a financial institution or market will trigger domino-like collapses throughout financial markets and the broader economy. SRISK measures the capital shortfall of a firm conditional on a severe market decline, and is a function of its size, leverage and risk. SRISK can be used not only to measure capital shortfalls in firms, but also undercapitalization of a country or global financial system. It forecasts how much capital a firm (country or global system) would need to raise were a crisis to occur and, naturally, leads to questioning savings sufficiency. It asks: how prepared is a firm, country, or global system for a financial crisis? Is there excessive credit growth (undercapitalization)? SRISK demonstrates that excessive credit growth creates important externalities in a globally interconnected financial system. It also provides a rational for global coordination of financial market regulation.
I encourage readers to visit V-Lab’s homepage. Take a look at global systemic risk by country, the systemic risk of U.S. financials, and a map of world volatility. Also, look at the chart “Risk Analysis Overview - All Financials Total SRISK” and enter the year 2000 as the starting date. Engle discussed this chart during the lecture, noting the four peaks during this time frame: the U.S. financial crisis, the European debt crisis, the slowdown in China, and right now! GLOBAL SRISK is on the rise! How Much SRISK is Too Much? I’m glad you asked! See Engle and Ruan’s answer: here.
I first encountered the concept of SRISK in working on The Impacts of Financial Regulations: Solvency and Liquidity in the Post Crisis Period (with Christine Cumming and Julapa Jagtiani). So, it was thrilling to finally have an opportunity to hear Engle speak, especially about SRISK and its importance. I hope it won't be the last!