Contemporary Accounting Research Vol. 42 No. 1 2025
Measuring systemic risk: A financial statement–based approach for insurance firms and banks
Abstract
We introduce CRISK, a financial statement–based measure, to assess the systemic risk contribution of a financial firm. CRISK measures the capital shortfall of a financial firm conditional on severe distress in the entire system. Our measure complements the market‐based measure, SRISK, introduced by Acharya et al. (2012, American Economic Review , 102 (3), 59–64) and Brownlees and Engle (2017, Review of Financial Studies , 30 (1), 48–79), in identifying systemically risky financial firms. While SRISK provides a timelier assessment using real‐time stock market data, CRISK offers a more nuanced approach using accounting information and is tailored to the distinct characteristics of insurance firms and commercial banks. Our empirical analysis shows that (1) compared to CRISK, SRISK tends to overestimate capital shortfalls for insurance firms and for banks that hold a substantial portion of Federal Deposit Insurance Corporation–insured deposits while underestimating capital shortfalls for banks heavily reliant on uninsured deposits; (2) CRISK estimates of capital shortfall closely align with the actual capital injections received by financial firms during the financial crisis of 2007–2009; and (3) CRISK exhibits a significant positive correlation with short interest. Based on our findings, we recommend using SRISK as an initial screening tool to identify potential systemically risky financial firms, followed by refining the list and validating the expected capital shortfall using CRISK.
- DOI
- 10.1111/1911-3846.13008
- Volume
- 42
- Issue
- 1
- Pages
- 490-524
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref