What is the information content of the SRISK measure as a supervisory tool?

The SRISK measure is advertised as measuring the recapitalization needed by a financial institution in the event of a financial crisis. It is computed from the estimated reaction of the institution’s share price in the event of a sharp drop in market prices. This indicator relies both on an economic analysis and an econometric model. It is applied to a large set of international and domestic financial institutions, updated regularly and made available online. Although innovative, it stirred naturally debates among academics, supervisors and professionals, highlighting some limitations, in particular when considering the SRISK measure as a supervisory tool. First, the SRISK is based on market return data: consequently, it applies only to listed institutions and is exposed to criticisms as to which extent it can mirror fundamentals. Second, the SRISK seems to lack sound foundations for policy analysis: with a reduced-form approach, conclusions regarding causality are not obvious from an economic point of view. Moreover the SRISK is a conditional measure to an event whose likelihood is not integrated in the framework. Third, empirical analyses of SRISK as a supervisory tool, used for instance to identify systemic financial institutions (SIFIs) or as an early-warning indicator, have shown some limited perspectives.