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Systemic Risk Allocation for Systems with A Small Number of Banks

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  • Xiao Qin
  • Chen Zhou

Abstract

This paper provides a new estimation method for the marginal expected shortfall (MES) based on multivariate extreme value theory. In contrast to previous studies, the method does not assume specific dependence structure among bank equity returns and is applicable to both large and small systems. Furthermore, our MES estimator inherits the theoretical additive property. Thus, it serves as a tool to allocate systemic risk. We apply the proposed method to 29 global systemically important financial institutions (G-SIFIs) to evaluate the cross sections and dynamics of the systemic risk allocation. We show that allocating systemic risk according to either size or individual risk is imperfect and can be unfair. Between the allocation with respect to individual risk and that with respect to size, the former is less unfair. On the time dimension, both allocation fairness across all the G-SIFIs has decreased since 2008.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 378.

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Date of creation: May 2013
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Handle: RePEc:dnb:dnbwpp:378

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Keywords: Systemic risk allocation; marginal expected shortfall; systemically important financial institutions; extreme value theory;

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  1. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2010. "Measuring systemic risk," Working Paper 1002, Federal Reserve Bank of Cleveland.
  2. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
  3. Nikola Tarashev & Claudio Borio & Kostas Tsatsaronis, 2010. "Attributing systemic risk to individual institutions," BIS Working Papers 308, Bank for International Settlements.
  4. Hartmann, Philipp & Straetmans, Stefan & de Vries, Casper, 2001. "Asset market linkages in crisis periods," Working Paper Series 0071, European Central Bank.
  5. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
  6. Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers dp627, Financial Markets Group.
  7. International Monetary Fund, 2012. "Short-Term Wholesale Funding and Systemic Risk," IMF Working Papers 12/46, International Monetary Fund.
  8. Xin Huang & Hao Zhou & Haibin Zhu, 2011. "Systemic risk contributions," Finance and Economics Discussion Series 2011-08, Board of Governors of the Federal Reserve System (U.S.).
  9. Moore, Kyle & Zhou, Chen, 2013. ""Too big to fail" or "Too non-traditional to fail"?: The determinants of banks' systemic importance," MPRA Paper 45589, University Library of Munich, Germany.
  10. Jorge A. Chan-Lau, 2010. "Regulatory Capital Charges for too-Connected-To-Fail Institutions," IMF Working Papers 10/98, International Monetary Fund.
  11. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
  12. Germán López-Espinosa & Antonio Moreno & Antonio Rubia & Laura Valderrama, 2012. "Short-term Wholesale Funding and Systemic Risk: A Global CoVaR Approach," Faculty Working Papers 02/12, School of Economics and Business Administration, University of Navarra.
  13. Allen, Franklin & Carletti, Elena, 2006. "Credit risk transfer and contagion," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 89-111, January.
  14. Cai, J. & Einmahl, J.H.J. & Haan, L.F.M. de & Zhou, C., 2012. "Estimation of the Marginal Expected Shortfall: The Mean when a Related Variable is Extreme," Discussion Paper 2012-080, Tilburg University, Center for Economic Research.
  15. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
  16. Nikola Tarashev & Claudio Borio & Kostas Tsatsaronis, 2009. "The systemic importance of financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
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