Pitfalls in Systemic-Risk Scoring

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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. Unlike 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.

Author(s):

Sylvain Benoit    
Dauphine
France

Christophe Hurlin    
France

Christophe Perignon    
HEC Paris
France