Systemic Risk

Analysis of the SRISK Measure and Its Application to the Canadian Banking and Insurance Industries

Authors: Thomas F. Coleman, University of Waterloo, Global Risk Institute, Alex LaPlante, Global Risk Institute, Alexey Rubtsov, Global Risk Institute
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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 (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


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