FIN-02-044

Incorporating Systemic Influences Into Risk Measurements: A Survey of the Literature

December 2002

Linda Allen and Anthony Saunders

ABSTRACT
Procyclicality has emerged as a potential drawback to adoption of risk-sensitive bank capital requirements. Systematic risk factors may result in increases (decreases) in bank capital requirements when the economy is depressed (overheated), thereby decreasing (increasing) bank lending capacity and exacerbating business cycle fluctuations. Procyclicality may result from systematic risk emanating from common macroeconomic influences or from interdependencies across firms as financial markets and institutions consolidate internationally. We describe cyclical effects on operational risk, credit risk and market risk measures.

Linda Allen
Institution: Zicklin School of Business, Baruch College 17 Lexington Avenue, Box 10-225, New York, NY 10010.
Email: Linda_Allen@baruch.cuny.edu

Anthony Saunders
Institution: Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012
Telephone: (212) 998-0711
Fax: (212) 995-4233
Email: asaunder@stern.nyu.edu
Homepage: http://www.stern.nyu.edu/~asaunder/

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