Press Releases

NYU Stern Systemic Risk Ranking Shows 18% Reduction in Systemic Risk Since July 2010

Severity of potential crisis has been reduced by $135.1 billion since last year
NEW YORK--At the one-year anniversary of the Dodd-Frank Act, the NYU Stern Systemic Risk Rankings, launched in April 2010 by New York University Stern School of Business, shows that systemic risk has been reduced by 18% since July 2010. The ranking, a weekly rating and ordering by level of risk that the largest U.S. financial institutions bring to the financial system, measures the potential severity (but not the probability) of a systemic financial crisis, were one to occur. The measure shows that systemic risk has been reduced from $750 billion a year ago to $615.6 billion today.

“The ranking shows that the cost to bail out the financial system today – should the US government choose to do so – would be $135 billion less than it would have been in July 2010, “ said Professor and Nobel Laureate Robert Engle, whose award-winning work on the ARCH model underpins the calculations. The risk to the system is still very serious but it is moving in the right direction.

The NYU Systemic Risk Ranking uses stock quotations and other market data, from 1990 to the present, to provide an early warning that will help regulators identify threats to the overall health of the financial system. Several indices are presented and combined to predict the expected loss of a firm in a future financial crisis. Ultimately, the Systemic Risk Contribution Index (SRISK%) ranks firms by the percentage of total system risk each is expected to contribute in a future crisis. The company that most reduced the amount of risk it brings to the financial system is AIG, which has cut its exposure by $43 billion. Goldman Sachs shows the most extreme increase in the risk, having added $15 billion of exposure since last year. The Systemic Risk Rankings take into consideration company size, exposure to loss of market capitalization, correlation and leverage. A complete rankings table showing data for 76 financial institutions is accessible online at the website of NYU Stern’s Volatility Laboratory (V-Lab), which Prof. Engle heads.

The development of the new rankings grew out of an extensive research effort surrounding the 2008 financial crisis. The ultimate goal behind the ranking is to provide regulators with a new tool to evaluate systemic risk that is more efficient, replicable and transparent than individual scrutiny of confidential company financial and accounting data. In contrast to rating the individual risk of a firm, these new rankings indicate which firms are most risky to the overall U.S. economy at a given time.

This research also resulted in the publication of “Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance,” (John Wiley & Sons, 2010) which addresses the Dodd-Frank Act, and is co-edited by Professors Viral Acharya, Thomas Cooley, Matthew Richardson and Ingo Walter. A recent NYU-Stern and Center for Economic Policy Research e-book "Dodd-Frank: One Year On" revisits the Dodd-Frank at its one-year anniversary, highlighting the challenges ahead."

About New York University Leonard N. Stern School of Business

New York University Stern School of Business, located in the heart of Greenwich Village, is one of the nation’s premier management education schools and research centers. NYU Stern offers a broad portfolio of academic programs at the graduate and undergraduate levels, all of them informed and enriched by the dynamism, energy and deep resources of the world’s business capital.

Contacts

Joanne Hvala, 212-998-0995
Jessica Neville, 514-840-3830