Analysis of the SRISK measure and its application to the Canadian banking and insurance industries
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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.
KeywordsSystemic risk Regulation Banking Insurance Risk measures
JEL ClassificationC22 C53 G01 G20 G28 G32
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.
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