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NYU Stern Unveils Global Systemic Risk Rankings

Rankings provide “wake-up call” to politicians that European banks are severely undercapitalized

The NYU Stern Global Systemic Risk Rankings show that European banks are undercapitalized at a rate that is greater than what has been previously reported... these rankings are a wake-up call for European politicians.

Rankings provide “wake-up call” to politicians that European banks are severely undercapitalized

New York, NY -- New York University Stern School of Business today announced the launch of a global version of its NYU Stern Systemic Risk Rankings, extending the weekly US rating and ordering by level of risk to encompass the global banking system. The top three most systemically risky banks are Deutsche Bank AG, BNP Paribas, and Barclays PLC. The announcement was made in conjunction with a research presentation by NYU Stern Professor Viral Acharya at the Global Systemic Risk Conference, hosted by the Federal Reserve Bank of New York, the Society for Financial Econometrics, and the NYU Stern Volatility Institute.

The global rating complements the NYU Stern Systemic Risk Rankings (released in April 2010) that tracks the largest U.S. financial institutions and the risk they bring to the financial system. The new rankings use stock quotations and other market data, from 1990 to the present, and provide an early warning that will help regulators and politicians identify threats to the overall health of the financial system. The rankings are accessible online from NYU Stern’s Volatility Lab, under the direction of Nobel Laureate Robert Engle, whose award-winning work on the ARCH model underpins the calculations. The rankings are part of a collaborative project with the Institute of Global Finance at The University of New South Wales and HEC Université de Lausanne.

“The NYU Stern Global Systemic Risk Rankings show that European banks are undercapitalized at a rate that is greater than what has been previously reported,” said Robert Engle. “The information is already priced into stock market values. Investors apparently recognize that European banks are undercapitalized, but these rankings are a wake-up call for European politicians.”

Several indices are presented and combined to predict the expected loss of a firm in a future financial crisis. The Marginal Expected Shortfall (MES) orders firms by the expected loss on equity each would experience if the market falls by at least two percent. 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 Systemic Risk Rankings take into consideration company size, exposure to loss of market capitalization, and leverage.

“Consistent with the vision of NYU Stern’s Volatility Lab and our Systemic Risk Rankings of US financial institutions, we view the Global Systemic Risk Rankings as another step towards better understanding the systemic risk of financial firms. By making these rankings available over the web, we hope they enhance the dialogue among academics, practitioners, and regulators alike, generating new ideas for measuring systemic risk,” Professor Engle explained. “Because they use available market data, the ultimate goal of our work is to provide a new tool to evaluate global systemic risk that is more efficient, replicable and transparent than individual scrutiny of confidential company financial and accounting data.”

The Systemic Risk Rankings are based on two related NYU Stern faculty research efforts. Professors of Finance Viral Acharya, Lasse Pedersen, Thomas Philippon and Matthew Richardson developed the Marginal Expected Shortfall (MES), the per dollar systemic risk contribution for each institution, in their paper “Measuring Systemic Risk.” Their paper provides the theoretical justification for the ranking. Professor Engle’s research and econometric model increased the precision and timeliness of the measure.

The development of the new rankings grew out of an extensive research effort surrounding the 2008 financial crisis that resulted in the publication of “Restoring Financial Stability: How to Repair a Failed System” (John Wiley & Sons, 2009), co-edited by Professors Acharya and Richardson, who authored the book’s chapter on regulating systemic risk. Professors Engle, Pedersen and Philippon were among the 33 faculty contributors. A second volume, “Regulating Wall Street: The New Architecture of Global Finance,” was published by Wiley in 2010.

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.


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