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Systemic Loss: A Measure of Financial Stability (in English)

The literature on modeling defaults in individual financial institutions has expanded dramatically. However, the links between defaults in individual institutions and system-wide crises remain inadequately understood, despite some recent attempts to transpose the existing indicators of the probability of default in individual institutions to the systemic level. The paper argues that any measure of systemic stability should incorporate three elements: probabilities of failure in individual financial institutions, loss given default in financial institutions, and correlation of defaults across institutions. It contains a review of existing measures of financial stability and finds that they generally fall short of this standard. The author demonstrates that looking at the distribution of systemic loss can lead to a clearer differentiation of cases of stability and instability.

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Article provided by Charles University Prague, Faculty of Social Sciences in its journal Finance a uver - Czech Journal of Economics and Finance.

Volume (Year): 57 (2007)
Issue (Month): 1-2 (March)
Pages: 5-26

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Handle: RePEc:fau:fauart:v:57:y:2007:i:1-2:p:5-26
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  1. Berger, Allen N & Davies, Sally M & Flannery, Mark J, 2000. "Comparing Market and Supervisory Assessments of Bank Performance: Who Knows What When?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(3), pages 641-67, August.
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  10. Jeffery W. Gunther & Mark E. Levonian & Robert R. Moore, 2001. "Can the stock market tell bank supervisors anything they don't already know?," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q II, pages 2-9.
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  12. John Krainer & Jose A. Lopez, 2003. "How might financial market information be used for supervisory purposes?," Economic Review, Federal Reserve Bank of San Francisco, pages 29-45.
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  15. Bongini, Paola & Laeven, Luc & Majnoni, Giovanni, 2002. "How good is the market at assessing bank fragility? A horse race between different indicators," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 1011-1028, May.
  16. Amadou N. R. Sy & Jorge A. Chan-Lau, 2006. "Distance-To-Default in Banking; A Bridge too Far?," IMF Working Papers 06/215, International Monetary Fund.
  17. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-42, September.
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  20. Martin Cihák & Heiko Hesse, 2007. "Cooperative Banks and Financial Stability," IMF Working Papers 07/2, International Monetary Fund.
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