Abstract:

The increasing globalization of financial markets has amplified the destructive power and contagion effects of financial crises， posing significant threats to national financial stability and economic development. Regulators face the critical challenge of establishing effective early warning signals. Financial stress indices， which represent price pressure in financial markets， and systemic risk indicators based on financial institution measures are both used as metrics for financial crises， but the relationship between them is unclear.The relationship between macro-level financial market pressures， as represented by FSIs， and micro-level systemic risk， as measured by the capital shortfalls of financial institutions （SRISK） is investigated. Specifically， it examines whether the aggregate capital shortages of individual financial institutions can explain the observed price pressures in the broader financial market. Furthermore， it is explored which form of standardized SRISK （relative to GDP， market value， or prudential capital requirements） provides the most robust explanation for financial market stress， thereby shedding light on the underlying mechanisms linking micro-level vulnerabilities to macro-level crises. Finally， it aims to develop internally consistent indicators for measuring financial crisis probability and systemic risk tolerance， ultimately leading to a practical early warning indicator.To address these questions， a multi-faceted approach is adopted. First， a comprehensive FSI for China is constructed using nine representative indicators from the money， stock， bond， and foreign exchange markets. Second， the SRISK for both Chinese and major global economies is estimated， representing the expected capital shortfall of financial institutions under a systemic event. The SRISK is then standardized in three ways： SRISK/GDP， SRISK/MV， and SRISK/（TA*k）. Third， both domestic and global regression models are established to empirically test the relationship between the FSI and the standardized SRISK measures. Fourth， based on the regression results， two internally consistent financial crisis metrics are derived： （1） the probability of a financial crisis， defined as the probability that the FSI exceeds a predefined threshold （mean plus one standard deviation）； and （2） SRISK capacity， defined as the maximum tolerable level of SRISK for a given probability of crisis （e.g.， 50%）. Finally， an early warning indicator is developed by comparing the actual SRISK to the estimated SRISK capacity.The empirical results demonstrate that micro-level systemic risk measures， particularly SRISK standardized by prudential capital requirements （SRISK/（TA*k））， can effectively explain macro-level price pressures in the financial market. The SRISK/（TA*k） variable consistently exhibits the strongest and most significant positive relationship with the FSI across different model specifications， suggesting that financial crises are closely associated with deleveraging behavior through asset fire sales to mitigate capital shortfalls. The estimated probability of a financial crisis in China aligns well with historical periods of heightened systemic risk. The global model tends to capture the impact of external shocks earlier than the domestic model， consistent with the nature of cross-border risk contagion. The analysis of SRISK capacity provides a dynamic measure of the system’s resilience to systemic risk. Valuable insights into the interconnectedness of macro and micro dimensions of financial crises are provided. By demonstrating that macro price pressures can be explained by micro-level capital shortfalls， a critical gap in the literature is bridged. The finding that SRISK standardized by prudential capital requirements is the most informative indicator highlights the importance of regulatory capital standards in mitigating systemic risk. The proposed early warning indicator， based on the ratio of SRISK to SRISK capacity， offers a practical tool for regulators to monitor systemic risk and implement timely interventions. The results also highlight the growing systemic importance of Chinese financial institutions in the global context. Overall， it contributes to a deeper understanding of financial crisis dynamics and provides valuable guidance for policymakers seeking to enhance financial stability.

Key words: financial crisis, financial stress, capital shortfalls, early-warning