S-factor spotlights banks’ high systemic risk

By Roy Smith, Kenneth Langone Professor of Entrepreneurship and Finance & Professor of Management Practice

Roy C. Smith

NYU Stern acknowledges that accounting differences between Generally Accepted Accounting Principles and International Financial Reporting Standards favour the Americans in their rankings.

This metric, called SRISK, estimates the amount of new capital that banks would have to raise if markets experienced a 40% drop over a short period in a panic situation, such as occurred in 2008.

The idea is that if the markets can’t supply the capital, some government body will need to do so. As of April 1, 2012, the top 1,200 global banks represented $4.81 trillion of such systemic risk, about 40% of which was concentrated in just 15 banks (11 of these were European, one American).

Despite all our regulatory efforts, therefore, systemic risk has become larger and remains as concentrated as it was just before the collapse of Lehman Brothers in 2008.

But SRISK is only a measure of what could be, not what is likely to happen. All banks, even in 2008, did not have to be bailed out. Bloomberg has tracked total bank write-offs between 2007 and 2009 at just $1.8 trillion, $1.2 trillion of which occurred in the US.

Read full article as published in Financial News.