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A framework for assessing the systemic risk of major financial institutions

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  • Huang, Xin
  • Zhou, Hao
  • Zhu, Haibin
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Abstract

In this paper we propose a framework for measuring and stress testing the systemic risk of a group of major financial institutions. The systemic risk is measured by the price of insurance against financial distress, which is based on ex ante measures of default probabilities of individual banks and forecasted asset return correlations. Importantly, using realized correlations estimated from high-frequency equity return data can significantly improve the accuracy of forecasted correlations. Our stress testing methodology, using an integrated micro-macro model, takes into account dynamic linkages between the health of major US banks and macro-financial conditions. Our results suggest that the theoretical insurance premium that would be charged to protect against losses that equal or exceed 15% of total liabilities of 12 major US financial firms stood at $110 billion in March 2008 and had a projected upper bound of $250 billion in July 2008.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 33 (2009)
Issue (Month): 11 (November)
Pages: 2036-2049
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Handle: RePEc:eee:jbfina:v:33:y:2009:i:11:p:2036-2049

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For corrections or technical questions regarding this item, or to correct its listing, contact: (Jeroen Loos).

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Keywords: Systemic risk Stress testing Portfolio credit risk Credit default swap High-frequency data;

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References

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Citations

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Cited by:
  1. Düllmann, Klaus & Puzanova, Natalia, 2011. "Systemic risk contributions: a credit portfolio approach," Discussion Paper Series 2: Banking and Financial Studies 2011,08, Deutsche Bundesbank, Research Centre.
  2. Rainer Masera, 2011. "Taking the moral hazard out of banking: the next fundamental step in financial reform," PSL Quarterly Review, APSL, vol. 64(257), pages 105-142.
  3. Mejía Cubillos, Javier, 2012. "Propuesta metodológica para el cálculo del riesgo sistémico financiero en estudios de Historia Económica: Aplicación para el caso de la banca libre en Antioquia, 1888
    [A methodology for assess    ," MPRA Paper 35460, University Library of Munich, Germany.
  4. Edward Kane, 2010. "Redefining and Containing Systemic Risk," Atlantic Economic Journal, International Atlantic Economic Society, vol. 38(3), pages 251-264, September.
  5. Gianni De Nicolò & Marcella Lucchetta, 2011. "Systemic Risks and the Macroeconomy," NBER Chapters, in: Quantifying Systemic Risk National Bureau of Economic Research, Inc.
  6. Robert J. Bianchi & Michael E. Drew & Thanula R. Wijeratne, 2010. "Systemic Risk, the TED Spread and Hedge Fund Returns," Discussion Papers in Finance finance:201004, Griffith University, Department of Accounting, Finance and Economics.
  7. Stijn Claessens & Eugenio Cerutti & Patrick McGuire, 2011. "Systemic Risks in Global Banking: What Available Data can tell us and What More Data are Needed?," IMF Working Papers 11/222, International Monetary Fund.
  8. Jose Giancarlo Gasha & Carlos I. Medeiros & Marcos Souto & Christian Capuano & Andre Santos & Jorge A. Chan-Lau, 2009. "Recent Advances in Credit Risk Modeling," IMF Working Papers 09/162, International Monetary Fund.
  9. Xin Huang & Hao Zhou & Haibin Zhu, 2011. "Systemic risk contributions," BIS Papers chapters, in: Bank for International Settlements (ed.), Macroprudential regulation and policy, volume 60, pages 36-43 Bank for International Settlements.
  10. Xin Zhang & Bernd Schwaab & Andre Lucas, 2011. "Conditional Probabilities and Contagion Measures for Euro Area Sovereign Default Risk," Tinbergen Institute Discussion Papers 11-176/2/DSF29, Tinbergen Institute.
  11. Andrew Filardo & Jason George & Mico Loretan & Guonan Ma & Anella Munro & Ilhyock Shim & Philip Wooldridge & James Yetman & Haibin Zhu, 2010. "The international financial crisis: timeline, impact and policy responses in Asia and the Pacific," BIS Papers chapters, in: Bank for International Settlements (ed.), The international financial crisis and policy challenges in Asia and the Pacific, volume 52, pages 21-82 Bank for International Settlements.
  12. Stephen Cecchetti & Ingo Fender & Kostas Patrick McGuire, 2010. "Toward a global risk map," BIS Working Papers 309, Bank for International Settlements.
    • Stephen Cecchetti & Ingo Fender & Patrick McGuire, 2010. "Toward a Global Risk Map," NBER Chapters, in: Wealth, Financial Intermediation and the Real Economy National Bureau of Economic Research, Inc.
  13. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2010. "Econometric Measures of Systemic Risk in the Finance and Insurance Sectors," NBER Working Papers 16223, National Bureau of Economic Research, Inc.
  14. Christian Weistroffer, 2011. "Identifying Systemically Important Financial Institutions (SIFIs)," Working Papers id:4383, eSocialSciences.
  15. Hao Zhou, 2011. "Comment on "Systemic Risks and the Macroeconomy"," NBER Chapters, in: Quantifying Systemic Risk National Bureau of Economic Research, Inc.
  16. Xin Huang & Hao Zhou & Haibin Zhu, 2010. "Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis," BIS Working Papers 296, Bank for International Settlements.
  17. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2012. "How to Calculate Systemic Risk Surcharges," NBER Chapters, in: Quantifying Systemic Risk National Bureau of Economic Research, Inc.
  18. Tao Sun, 2011. "Identifying Vulnerabilities in Systemically-Important Financial Institutions in a Macro-financial Linkages Framework," IMF Working Papers 11/111, International Monetary Fund.
  19. Anginer, Deniz & Demirguc-Kunt, Asli, 2011. "Has the global banking system become more fragile over time ?," Policy Research Working Paper Series 5849, The World Bank.

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