SRISK — expected capital shortfall
How big a capital hole would open in a systemic crisis? SRISK = k·D − (1 − k)(1 − LRMES)·W compares the equity a prudential ratio k requires against debt to the equity expected to survive a crash. Positive SRISK is a shortfall; it climbs with leverage D/W and with LRMES.
SRISK (expected capital shortfall)+US$39.8bn
MES (1-day) 3.0%LRMES (crisis) 42%Leverage D/W 15.0×
SRISK = required cushion k·D − surviving equity (1 − k)(1 − LRMES)·W
Market equity W (US$bn)US$60bn
Book debt D (US$bn)US$900bn
Prudential capital ratio k8.0%
MES, 1-day (%)3.0%
MES — expected 1-day equity loss given a market tail.
LRMES — long-run MES, the expected equity drop in a six-month crisis: 1 − exp(−18·MES).
SRISK — expected capital shortfall built from LRMES, debt, equity, and k.
A crisis would leave only US$32.2bn of surviving equity against a required cushion of US$72.0bn, a shortfall of US$39.8bn. Large size, heavy leverage, and high LRMES together make a firm systemically risky.
A sibling measure, ΔCoVaR, takes the other view: the system's VaR when this bank is in distress minus its VaR when the bank is at its median state — the firm's marginal contribution to system risk.