This paper develops, analyses and implements an early warning tool for systemic risk in banks and financial entities. The tool is based on a refined approach to stress testing. Calculations performed on Australian bank data are shown to predict past distres. Risk is measured as a function of expected capital shortfall in individual firms. A...

SRISK methodology recently proposed in the literature is refined and extended. The refinement is to define systemic risk using a formalised stress testing framework including a stress function. Baseline risk and the stress risk are in terms of the ordinary and stressed expectation. Stressed expectation is expectation computed under a hypothetical stress, modelled with the...