Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis
AbstractThis paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as the insurance cost to protect against distressed losses in a banking system, is a summary indicator of market perceived risk that reflects expected default risk of individual banks, risk premia as well as correlated defaults. An application of our methodology to a portfolio of twenty-two major banks in Asia and the Pacific illustrates the dynamics of the spillover effects of the global financial crisis to the region. The increase in the perceived systemic risk, particularly after the failure of Lehman Brothers, was mainly driven by the heightened risk aversion and the squeezed liquidity. Further analysis, which is based on our proposed approach to quantifying the marginal contribution of individual banks to the systemic risk, suggests that “too-big-to-fail” is a valid concern from a macroprudential perspective of bank regulation.
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Bibliographic InfoPaper provided by Bank for International Settlements in its series BIS Working Papers with number 296.
Length: 47 pages
Date of creation: Jan 2010
Date of revision:
systemic risk; Macroprudential regulation; Portfolio distress loss; Credit default swap; Dynamic conditional correlation;
Other versions of this item:
- Huang, Xin & Zhou, Hao & Zhu, Haibin, 2012. "Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis," Journal of Financial Stability, Elsevier, vol. 8(3), pages 193-205.
- Xin Huang & Hao Zhou & Haibin Zhu, 2009. "Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis," Finance and Economics Discussion Series 2009-44, Board of Governors of the Federal Reserve System (U.S.).
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-02-05 (All new papers)
- NEP-BAN-2010-02-05 (Banking)
- NEP-REG-2010-02-05 (Regulation)
- NEP-RMG-2010-02-05 (Risk Management)
- NEP-SEA-2010-02-05 (South East Asia)
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