NYU Ranks Systemic Risk of Wall Street

Wall Street Ranking

Summary: Investors are looking for clear signs of risky investments and regulators seek many ways in order to prevent another meltdown. Amidst the confusion, some researchers from New York University devised a way to rank financial institutions measuring the financial system's greatest systemic risk.

A group of researchers from Stern School of Business at New York University shared a proposal with officials at International Monetary Fund and New York's Federal Reserve Bank.

This proposal ranked 102 financial institutions by measuring the impact that each of them could make on the financial system overall. The researchers used three methodologies. First of all, they looked at the biggest declines since 1960s through 5% of trading days while calculating the amount of stock losses on each institution.

Next, they ranked the risk profile of every institution by calculating the losses during bad days and made it a percentage of the overall market value. The third step may prove to be the most controversial – the group is proposing that each financial institution should be required to take an insurance policy paying out to the government whenever a financial crisis happens.

A finance professor of NYU and one of the authors of the project, Matthew Richardson, said, “Even if not all institutions are significantly systemic by themselves, they may show ‘red flags’ for regulators that are seeking to uncover some financial system’s vulnerable links. The researchers calculated rankings using data from June 2007 to be sure that they tested their research’s predictive qualities and measured the risk of the financial institutions before the financial crisis. The biggest financial institutions on top of the list are Citigroup, JP Morgan Chase, Bank of America, Morgan Stanley, and Goldman Sachs Group.

NYU Ranks Systemic Risk of Wall Street

Wall Street Ranking

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