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Are Banks Too Big to Fail? Measuring Systemic Importance of Financial Institutions

  • Chen Zhou

    (De Nederlandsche Bank and Erasmus University Rotterdam)

This paper considers three measures of the systemic importance of a financial institution within an interconnected financial system. The measures are applied to study the relation between the size of a financial institution and its systemic importance. Both the theoretical model and empirical analysis reveal that, when analyzing the systemic risk posed by one financial institution to the system, size should not be considered as a proxy of systemic importance. In other words, the “too big to fail” argument is not always valid, and measures of systemic importance should be considered. We provide the estimation methodology of systemic importance measures under the multivariate extreme value theory (EVT) framework.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 6 (2010)
Issue (Month): 34 (December)
Pages: 205-250

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Handle: RePEc:ijc:ijcjou:y:2010:q:4:a:10
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  1. Francis X. Diebold & Kamil Yılmaz, 2007. "Measuring Financial Asset Return and Volatility Spillovers, With Application to Global Equity Markets," Koç University-TUSIAD Economic Research Forum Working Papers 0705, Koc University-TUSIAD Economic Research Forum.
  2. Amil Dasgupta, 2004. "Financial Contagion Through Capital Connections: A Model of the Origin and Spread of Bank Panics," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 1049-1084, December.
  3. Miguel A. Segoviano & Charles Goodhart, 2009. "Banking stability measures," LSE Research Online Documents on Economics 24416, London School of Economics and Political Science, LSE Library.
  4. Franklin Allen & Ana Babus & Elena Carletti, 2009. "Financial Crises: Theory and Evidence," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 97-116, November.
  5. Xavier Freixas & Bruno M. Parigi & Jean-Charles Rochet, 2000. "Systemic risk, interbank relations, and liquidity provision by the central bank," Proceedings, Federal Reserve Bank of Cleveland, pages 611-640.
  6. Acharya, Viral V. & Yorulmazer, Tanju, 2007. "Too many to fail--An analysis of time-inconsistency in bank closure policies," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 1-31, January.
  7. Philipp Hartmann & Stefan Straetmans & Casper G. De Vries, 2005. "Banking System Stability: A Cross-Atlantic Perspective," NBER Working Papers 11698, National Bureau of Economic Research, Inc.
  8. Rodrigo Cifuentes & Gianluigi Ferrucci & Hyun Song Shin, 2005. "Liquidity risk and contagion," Bank of England working papers 264, Bank of England.
  9. Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers dp627, Financial Markets Group.
  10. De Vries, C.G., 2005. "The simple economics of bank fragility," Journal of Banking & Finance, Elsevier, vol. 29(4), pages 803-825, April.
  11. V. Chavez-Demoulin & A. C. Davison & A. J. McNeil, 2005. "Estimating value-at-risk: a point process approach," Quantitative Finance, Taylor & Francis Journals, vol. 5(2), pages 227-234.
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