A NEW MACROPRUDENTIAL TOOL TO ASSESS SOURCES OF FINANCIAL RISKS: IMPLIED‐SYSTEMIC COST OF RISKS

ABSTRACT The new macroprudential Implied‐Systemic Cost Of Risks (I‐SCOR) index, derived from MCNulty's implied cost of capital and enriched to account for the risks materialized during this crisis (collateral, liquidity and tail risk), well highlighted and distinguish the risks that contributed to each phase of the financial turmoil (Lehman, East Europe, and EU sovereign). The index has proved during all the period of analysis to rank correctly over time and over other analysis dimensions (sectoral and geographical) where strains where growing. Moreover, its expression in percentage points make it an ‘easy to interpret’ measure of crisis. Using this macroprudential index, it is possible to analyse financial markets conditions in a ‘scalable’ way: starting from the high stage of a ‘geographical’ and general index level, than drilling down on the sector or the country, in order to detect where risks are growing. Moreover, the analysis can be completed taking into account risk drivers so that the overall analysis performed with the deployment of the I‐SCOR index can be seen in different dimensions (views). Copyright © 2014 John Wiley & Sons, Ltd.