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Measuring the tail risks of banks

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  • Wagner, Wolf

Abstract

In order to address the risk of systemic crises it is of paramount importance to have advance information about banks’ exposures to large (negative) shocks. In this paper we develop a simple method for quantifying such exposures in a forward-looking manner. The method is based on estimating banks’ share prices sensitivities to (market) put options and does not require the actual observation of tail risk events. Interestingly, we find that estimated tail risk exposures for U.S. Bank Holding Companies are negatively correlated with their share price beta, suggesting that banks which appear safer in normal periods are actually more crisis prone. We also study the determinants of banks’ tail risk exposures and find that their key drivers are uninsured deposits and non-traditional activities that leave assets on banks’ balance sheets.

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  • Wagner, Wolf, 2010. "Measuring the tail risks of banks," Papers 97, World Trade Institute.
    • Handle: RePEc:wti:papers:97
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    References listed on IDEAS

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    1. Knaup, M. & Wagner, W.B., 2009. "A Market Based Measure of Credit Quality and Banks' Performance During the Subprime Crisis," Discussion Paper 2009-35 S, Tilburg University, Center for Economic Research.
    2. Gunter Franke & Jan Pieter Krahnen, 2007. "Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations," NBER Chapters, in: The Risks of Financial Institutions, pages 603-631, National Bureau of Economic Research, Inc.
    3. Mark Flannery, 2001. "The Faces of “Market Discipline”," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 107-119, October.
    4. Iftekhar Hasan & Larry D. Wall, 2004. "Determinants of the Loan Loss Allowance: Some Cross‐Country Comparisons," The Financial Review, Eastern Finance Association, vol. 39(1), pages 129-152, February.
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    Cited by:

    1. 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.
    2. Vallascas, Francesco & Keasey, Kevin, 2012. "Bank resilience to systemic shocks and the stability of banking systems: Small is beautiful," Journal of International Money and Finance, Elsevier, vol. 31(6), pages 1745-1776.
    3. Qin, Xiao & Zhou, Chunyang, 2019. "Financial structure and determinants of systemic risk contribution," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    4. Kyle Moore & Chen Zhou, 2012. "Identifying systemically important financial institutions: size and other determinants," DNB Working Papers 347, Netherlands Central Bank, Research Department.

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