Dealing with systematic risk when we measure it badly

Danielsson, Jon ORCID: 0009-0006-9844-7960, James, Kevin R., Valenzuela, Marcela and Zer, Ilknur (2012) Dealing with systematic risk when we measure it badly. . European Center for Advanced Research in Economics and Statistics.

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Abstract

While an omniscient regulator would base a bank's capital requirement upon its contribution to systemic risk, we show that a regulator who measures a bank's contribution to systemic risk badly will find it optimal to use a simple leverage ratio instead. We empirically analyze the performance of leading risk measurement methods and find that they are incapable of providing either precise estimates of an individual bank's contribution to systemic risk or reliable rankings of banks by the amount of systemic risk they create. We conclude that a leverage ratio dominates a policy of systemic risk based capital requirements.

Item Type:	Monograph (Working Paper)
Official URL:	http://www.ecares.org/
Additional Information:	© 2012 The Authors
Divisions:	Finance Financial Markets Group
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
JEL classification:	D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure G - Financial Economics > G3 - Corporate Finance and Governance > G38 - Government Policy and Regulation
Date Deposited:	16 Apr 2012 15:11
Last Modified:	01 Oct 2024 03:18
URI:	http://eprints.lse.ac.uk/id/eprint/43135

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