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Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis

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  • Xin Huang
  • Hao Zhou
  • Haibin Zhu
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Abstract

This 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 risk-neutral concept of capital based on publicly available information that can be appropriately aggregated across different subsets. 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. The analysis on 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 Info

Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2009-44.

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Date of creation: 2009
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Handle: RePEc:fip:fedgfe:2009-44

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Keywords: Banks and banking ; Risk assessment;

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