In a recent article on the International Business Times, NYU Stern Professor Robert Engle discussed banking stress tests and the NYU Stern Systemic Risk Rankings. Following the first round of the Federal Reserve’s annual stress tests last week- in which an unprecedented 31 major US-based banks were deemed able to continue operating in a deep economic downturn- many analysts raised concerns about whether these tests were diversified enough to predict or prevent the next financial crisis.
Professor Engle, who pioneered a way of measuring the riskiness of individual banks at NYU, explained:
“There are obviously a lot of issues about how you choose the scenarios that you’re going to use. The use of one or two scenarios is a drawback. Other industries, like insurance, use thousands of scenarios.”
In comparison to the Federal Reserve’s banking stress tests, Professor Engle also discussed the NYU Stern Systemic Risk Rankings:
The alternative test Engle and his colleagues have designed provides an example of what a more systemic approach might look like. Dubbed the V-Lab, the process uses publicly available metrics to gauge how individual banks, and their underlying equities, might react to overall shifts in the market.
“We ask, ‘How much is the equity going to fall in the case of a financial crisis?’” Engle said. Since banks hold vast stores of diverse assets, broader market movements correlate with the rise and fall of individual banks. “The amount they go down is a way of measuring how sensitive they are to overall collapse.”
To read the entire article on International Business Times, click here.
To learn more about NYU Stern’s V Lab, please click here.