Systemic Risk Contributions

by Xin Huang of the Federal Reserve Board,
Hao Zhou of the Federal Reserve Board, and
Haibin Zhu of the Federal Reserve Board

January 2011

Abstract: We adopt a systemic risk indicator measured by the price of insurance against systemic financial distress and assess individual banks' marginal contributions to the systemic risk. The methodology is applied using publicly available data to the 19 bank holding companies covered by the U.S. Supervisory Capital Assessment Program (SCAP), with the systemic risk indicator peaking around $1.1 trillion in March 2009. Our systemic risk contribution measure shows interesting similarity to and divergence from the SCAP expected loss measure. In general, we find that a bank's contribution to the systemic risk is roughly linear in its default probability but highly nonlinear with respect to institution size and asset correlation.

JEL Classification: G21, G28, G14.

Keywords: Distress Insurance Premium, Systemic Risk, Macroprudential Regulation, Large Complex Financial Institution, Too-Big-to-Fail, Too-Connected-to-Fail

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