SSC said today that it would cut 630 jobs in a conference call and filing larded down with jargon to soften the fact that it’s canning 2% of its staff. The result, according to CEO Joseph Hooley, will be a “leaner, more efficient, and more profitable enterprise,” even after one takes into account the roughly $220K a head it will cost to lay people off. Read more »
This paper proposes a theoretically sound and easy-to-implement way to measure the systemic risk of financial institutions using publicly available accounting and stock market data. The measure models credit risk of banks as a put option on bank assets, a tradition that originated with Merton (1974). We extend his contribution by expressing the value of banking-sector losses from systemic default risk as the value of a put option written on a portfolio of aggregate bank assets whose exercise price equals the face value of aggregate bank debt. We conceive of an individual bank’s systemic risk as its contribution to the value of this potential sector-wide put on the financial safety net. To track the interaction of private and governmental sources of systemic risk during and in advance of successive business-cycle contractions, we apply our model to quarterly data over the period 1974-2010. Results indicate that systemic risk reached unprecedented highs during the years 2008-2010, and that bank size, leverage, and asset risk are key drivers of systemic risk.
A “theoretically sound and easy-to-implement way to measure the systemic risk of financial institutions” sounds pretty good! Is it easy to implement? Well let’s implement it to find out. [Pounds head against Google Spreadsheets.] Umm. Okay, I guess it was easy? I don’t know, I can’t fully replicate their numbers; tell me where I’m wrong in the comments. Or don’t. Read more »