New measurements identify the institutions that pose the greatest risk.
We are now well past the worst throes of the financial crisis. Banks and financial institutions are earning record profits. The economy is recovering steadily. All is right with the world! Wishful thinking. The uproar over the fraud charges against Goldman Sachs last week should have underscored that we still haven't addressed the underlying sources of the risk that caused our financial collapse in 2007-2009.
In the wake of the charges the value of Goldman's stock plummeted and brought the shares of other banks down with it. It was an ominous sign that the markets realize there is still plenty of systemic risk in our banking system.
A group of my colleagues at the NYU Stern School of Business have been working since the beginning of the crisis to figure out how we can measure the risk that firms pose for the financial system as a whole. There are two parts to the risk that firms carry: 1) the risk they impose for their own shareholders because of the strategies they use to earn profits; and 2) the risk they create that spills over to the system as a whole if they get into trouble. We now have measures of that risk. The measures are updated weekly and viewable online
Read the full opinion editorial at Forbes.com.