Advertisement

Annals of Finance

, Volume 14, Issue 4, pp 547–570 | Cite as

Analysis of the SRISK measure and its application to the Canadian banking and insurance industries

  • Thomas F. Coleman
  • Alex LaPlante
  • Alexey Rubtsov
Research Article
  • 83 Downloads

Abstract

In this paper, we analyse, modify, and apply one of the most widely used measures of systemic risk, SRISK, developed by Brownlees and Engle (in Rev Financ Stud 30:48–79, 2016). The measure is defined as the expected capital shortfall of a firm conditional on a prolonged market decline. We argue that segregated funds, also known as separate accounts in the US, should be excluded from actuarial liabilities when SRISK is calculated for insurance companies. We also demonstrate the importance of careful analysis of accounting standards when specifying the prudential capital ratio used in SRISK methodology. Based on the proposed adjustments to SRISK, we assess the systemic risk of the Canadian banking and insurance industries. It is shown that in its current implementation, the SRISK methodology substantially overestimates the systemic risk of Canadian insurance companies.

Keywords

Systemic risk Regulation Banking Insurance Risk measures 

JEL Classification

C22 C53 G01 G20 G28 G32 

Notes

Acknowledgements

We would like to thank Robert Engle for his valuable feedback on this paper. We would also like to thank Ling Luo, Anthony Vaz, Hui Wang, Wei Xu, and Denglin Zhou, and the participants of the Workshop on Systemic Risk in Insurance at Columbia University for their insightful comments.

References

  1. Acharya, V., Richardson, M.: Is the insurance industry systemically risky? In: Biggs, J.H., Richardson, M. (eds.) Modernizing Insurance Regulation, pp. 151–180. Wiley, Hoboken (2014)CrossRefGoogle Scholar
  2. Acharya, V., Engle, R., Richardson, M.: Capital shortfall: a new approach to ranking and regulating systemic risks. Am Econ Rev 102(3), 59–64 (2012)CrossRefGoogle Scholar
  3. Acharya, V., Pedersen, L., Philippon, T., Richardson, M.: Measuring systemic risk. Rev Financ Stud 30(1), 2–47 (2017)CrossRefGoogle Scholar
  4. Adrian, T., Brunnermeier, M.: CoVaR. Am Econ Rev 106(7), 1705–1741 (2016)CrossRefGoogle Scholar
  5. Allen, L., Bali, T.G., Tang, Y.: Does systemic risk in the financial sector predict future economic downturns? Rev Financ Stud 25, 3000–3036 (2012)CrossRefGoogle Scholar
  6. Biggs, J., Richardson, M.: Modernizing Insurance Regulation. Wiley Finance Series. Wiley, Hoboken (2014)CrossRefGoogle Scholar
  7. Brownlees, C., Engle, R.: SRISK: a conditional capital shortfall measure of systemic risk. Rev Financ Stud 30, 48–79 (2016)CrossRefGoogle Scholar
  8. Brunnermeier, M., Cheredito, P. (2014): Measuring and allocating systemic risk. Working paper (2014)Google Scholar
  9. Canada: 2009 Article IV Consultation—Staff Report; Staff Statement; and Public Information Notice on the Executive Board Discussion. IMF Country Report No. 09/162Google Scholar
  10. Cummins, D., Weiss, M. (2013): Systemic risk and regulation of the US Insurance Industry. Working paper (2013)Google Scholar
  11. Danielsson, J., James, K.R., Valenzuela, M., Zer, I.: Can We prove a bank guilty of creating systemic risk? A minority report. J Money Credit Bank 48(4), 795–812 (2016)CrossRefGoogle Scholar
  12. Engle, R.: Dynamic conditional correlation: a simple class of multivariate generalized autoregressive conditional heteroskedasticity models. J Bus Econ Stat 20, 339–350 (2002)CrossRefGoogle Scholar
  13. Engle, R.: Anticipating Correlations: A New Paradigm for Risk Management. Princeton University Press, Princeton (2009)Google Scholar
  14. Engle, R., Jondeau, E., Rockinger, M.: Systemic risk in Europe. Rev Finance 19, 145–190 (2015)CrossRefGoogle Scholar
  15. Glosten, L., Jagananthan, R., Runkle, D.: On the relation between the expected value and the volatility of the nominal excess return on stocks. J Finance 48, 1779–1801 (1993)CrossRefGoogle Scholar
  16. Harrington, S.: The financial crisis, systematic risk, and the future of insurance regulation. J Risk Insur 76, 785–819 (2009)CrossRefGoogle Scholar
  17. Harrington, S. (2010): Insurance regulation and the Dodd-Frank Act. Working paper (2010)Google Scholar
  18. Huang, X., Zhou, H., Zhu, H.: Systemic risk contributions. J Financ Serv Res 42, 55–83 (2011)CrossRefGoogle Scholar
  19. Invest in Canada (2016): Government of Canada report (2016) http://www.international.gc.ca/investors-investisseurs/iic-iac/publications.aspx?lang=eng
  20. IMF Country Report. No.09/163, Canada: Selected Issues. https://www.imf.org/external/pubs/ft/scr/2009/cr09163.pdf (2009)
  21. Iyengar, G., Luo, Y., Rajgopal, S., Venkatasubramanian, V., Zhang, A. (2017): Towards a financial statement based approach to modelling systemic risk in insurance and banking. Working paper (2017)Google Scholar
  22. Lee, J., Ryu, J., Tsomocos, D.: Measures of systemic risk and financial fragility in Korea. Ann Finance 9(4), 757–786 (2013)CrossRefGoogle Scholar
  23. Morales, M., Estrada, D.: A financial stability index for Colombia. Ann Finance 6(4), 555–581 (2010)CrossRefGoogle Scholar
  24. Scott, H., Ricci, K., Sarfatti, A. (2016): SRISK as a measure of systemic risk for insurers: oversimplified and inappropriate. Working paper (2016)Google Scholar
  25. Tabak, B., Cajueiro, D., Fazio, D.: Financial fragility in a general equilibrium model: the Brazilian case. Ann Finance 9(3), 519–541 (2013)CrossRefGoogle Scholar

Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018
Corrected Publication 08/2018

Authors and Affiliations

  • Thomas F. Coleman
    • 1
  • Alex LaPlante
    • 2
  • Alexey Rubtsov
    • 2
  1. 1.Waterloo Research Institute in Insurance, Securities, and Quantitative Finance (WatRISQ)University of WaterlooWaterlooCanada
  2. 2.Global Risk Institute in Financial ServicesTorontoCanada

Personalised recommendations