BENOIT Sylvain

In this paper, we identify several shortcomings in the systemic-risk scoring methodology currently used to identify and regulate Systemically Important Financial Institutions (SIFIs). Using newly-disclosed regulatory data for 119 US and international banks, we show that the current scoring methodology severely distorts the allocation of regulatory capital among banks. We then propose and implement a methodology that corrects for these shortcomings and increases incentives for banks to reduce their risk contributions.

We identify several shortcomings in the systemic-risk scoring methodology currently used to identify and regulate Systemically Important Financial Institutions (SIFIs). Using newly-disclosed regulatory data for 119 US and international banks, we show that the current scoring methodology severely distorts the allocation of regulatory capital among banks. We then propose and implement a methodology that corrects for these short-comings and increases incentives for banks to reduce their risk contributions. Unlike the current scores, our adjusted scores are mainly driven by risk indicators directly under the control of the regulated bank and not by factors that are exogenous to the bank, such as exchange rates or other banks' actions.

We review the extensive literature on systemic risk and connect it to the current regulatory debate. While we take stock of the achievements of this rapidly growing field, we identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure.

We show how to reverse-engineer banks’ risk disclosures, such as value-at-risk, to obtain an implied measure of their exposures to equity, interest rate, foreign exchange, and commodity risks. Factor implied risk exposures are obtained by breaking down a change in risk disclosure into a market volatility component and a bank-specific risk exposure component. In a study of large US and international banks, we show that (i) changes in risk exposures are negatively correlated with market volatility and (ii) changes in risk exposures are positively correlated across banks, which is consistent with banks exhibiting commonality in trading.

We review the extensive literature on systemic risk and connect it to the current regulatory debate. While we take stock of the achievements of this rapidly growing field, we identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure.

We review the extensive literature on systemic risk and connect it to the current regulatory debate. While we take stock of the achievements of this rapidly growing field, we identify a gap between two main approaches. The first one studies different sources of systemic risk in isolation, uses confidential data, and inspires targeted but complex regulatory tools. The second approach uses market data to produce global measures which are not directly connected to any particular theory, but could support a more efficient regulation. Bridging this gap will require encompassing theoretical models and improved data disclosure.

We show how to reverse-engineer banks' risk disclosures, such as Value-at-Risk, to obtain an implied measure of their exposures to equity, interest rate, foreign exchange, and commodity risks. Factor Implied Risk Exposures (FIRE) are obtained by breaking down a change in risk disclosure into a market volatility component and a bank-specific risk exposure component. In a study of large US and international banks, we show that (1) changes in risk exposures are negatively correlated with market volatility and (2) changes in risk exposures are positively correlated across banks, which is consistent with banks exhibiting commonality in trading.

Systemic risk played a key role in the spread of the last global financial crisis. many measures of systemic risk have been developed to assess the contribution of a financial institution to system-wide risk. However, many questions regarding the ability of these measures to identify systemically important financial institutions (SIFIs) have been raised since systemic risk has multiple facets and some of them are difficult to identify, such as similarities between financial institutions.The general objective of this thesis in finance is therefore (i) to propose an empirical solution to identify SIFIs at the national level, (ii) to compare theoretically and empirically different measures of systemic risk and (iii) to measure changes in banks' risk exposures.First, chapter 1 proposes an adjustment of three market-based measures of systemic risk designed in an international framework to identify SIFIs at the national level. Second, chapter 2 introduces a common model in which several measures of systemic risk are expressed and compared. It is theoretically established that these systemic risk measures can be expressed in terms of traditional risk measures. Empirical application confirms these results and shows that these measures are not able to capture the multidimensional nature of systemic risk. Finally, Chapter 3 presents the Factor Implied Risk Exposures (FIRE) methodology for decomposing a change in a bank's risk measure into two components, the first representing market volatility and the second representing the bank's risk exposure. This chapter empirically illustrates that changes in risk exposures are positively correlated across banks, which is consistent with the fact that banks have similarities in their market positions.

We show how to reverse-engineer banks' risk disclosures, such as Value-at-Risk, to obtain an implied measure of their exposures to equity, interest rate, foreign exchange, and commodity risks. Factor Implied Risk Exposures (FIRE) are obtained by breaking down a change in risk disclosure into a market volatility component and a bank-specific risk exposure component. In a study of large US and international banks, we show that (1) changes in risk exposures are negatively correlated with market volatility and (2) changes in risk exposures are positively correlated across banks, which is consistent with banks exhibiting commonality in trading.

We derive several popular systemic risk measures in a common framework and show that they can be expressed as transformations of market risk measures (e.g., beta). We also derive conditions under which the different measures lead to similar rankings of systemically important financial institutions (SIFIs). In an empirical analysis of US financial institutions, we show that (1) different systemic risk measures identify different SIFIs and that (2) firm rankings based on systemic risk estimates mirror rankings obtained by sorting firms on market risk or liabilities. One-factor linear models explain most of the variability of the systemic risk estimates, which indicates that systemic risk measures fall short in capturing the multiple facets of systemic risk.