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Systemic Risk Allocation for Systems with A Small Number of Banks

  • Xiao Qin
  • Chen Zhou

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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File URL: http://www.dnb.nl/en/binaries/Working%20Paper%20378_tcm47-291376.pdf
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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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Web page: http://www.dnb.nl/en/

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  1. Allen, Franklin & Carletti, Elena, 2006. "Credit risk transfer and contagion," Journal of Monetary Economics, Elsevier, vol. 53(1), pages 89-111, January.
  2. Cai, J. & Einmahl, J.H.J. & de Haan, L.F.M. & 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.
  3. International Monetary Fund, 2012. "Short-Term Wholesale Funding and Systemic Risk; A Global Covar Approach," IMF Working Papers 12/46, International Monetary Fund.
  4. de Vries, Casper G & Hartmann, Philipp & Straetmans, Stefan, 2001. "Asset Market Linkages in Crisis Periods," CEPR Discussion Papers 2916, C.E.P.R. Discussion Papers.
  5. Acharya, Viral V & Pedersen, Lasse H & Philippon, Thomas & Richardson, Matthew P, 2012. "Measuring Systemic Risk," CEPR Discussion Papers 8824, C.E.P.R. Discussion Papers.
  6. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
  7. Monica Billio & Mila Getmansky & Andrew W. Lo & Loriana Pelizzon, 2011. "Econometric Measures of Connectedness and Systemic Risk in the Finance and Insurance Sectors," Working Papers 2011_21, Department of Economics, University of Venice "Ca' Foscari".
  8. Nikola Tarashev & Claudio Borio & Kostas Tsatsaronis, 2010. "Attributing systemic risk to individual institutions," BIS Working Papers 308, Bank for International Settlements.
  9. 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.
  10. Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers dp627, Financial Markets Group.
  11. 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.).
  12. Jorge A. Chan-Lau, 2010. "Regulatory Capital Charges for too-Connected-To-Fail Institutions; A Practical Proposal," IMF Working Papers 10/98, International Monetary Fund.
  13. repec:dgr:kubcen:2012080 is not listed on IDEAS
  14. Nikola Tarashev & Claudio Borio & Kostas Tsatsaronis, 2009. "The systemic importance of financial institutions," BIS Quarterly Review, Bank for International Settlements, September.
  15. 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.
  16. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July.
  17. S. T. M. Straetmans & W. F. C. Verschoor & C. C. P. Wolff, 2008. "Extreme US stock market fluctuations in the wake of 9|11," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 17-42.
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