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Systemic risk contributions: a credit portfolio approach

  • Düllmann, Klaus
  • Puzanova, Natalia
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    We put forward a Merton-type multi-factor portfolio model for assessing banks' contributions to systemic risk. This model accounts for the major drivers of banks' systemic relevance: size, default risk and correlation of banks' assets as a proxy for interconnectedness. We measure systemic risk in terms of the portfolio expected shortfall (ES). Banks' (marginal) risk contributions are calculated based on partial derivatives of the ES in order to ensure a full risk allocation among institutions. We compare the performance of an importance sampling algorithm with a fast analytical approximation of the ES and the marginal risk contributions. Furthermore, we show empirically for a portfolio of large international banks how our approach could be implemented to compute bank-specific capital surcharges for systemic risk or stabilisation fees. We find that size alone is not a reliable proxy for the systemic importance of a bank in this framework. In order to smooth cyclical fluctuations of the risk measure, we explore a time-varying confidence level of the ES.

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    File URL: http://econstor.eu/bitstream/10419/45638/1/659509679.pdf
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    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2011,08.

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    Date of creation: 2011
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    Handle: RePEc:zbw:bubdp2:201108
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    1. Acerbi, Carlo & Tasche, Dirk, 2002. "On the coherence of expected shortfall," Journal of Banking & Finance, Elsevier, vol. 26(7), pages 1487-1503, July.
    2. Susanne Emmer & Dirk Tasche, 2003. "Calculating credit risk capital charges with the one-factor model," Papers cond-mat/0302402, arXiv.org, revised Jan 2005.
    3. Bartram, Sohnke M. & Brown, Gregory W. & Hund, John E., 2007. "Estimating systemic risk in the international financial system," Journal of Financial Economics, Elsevier, vol. 86(3), pages 835-869, December.
    4. De Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic risk: A survey," Working Paper Series 0035, European Central Bank.
    5. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2010. "Measuring systemic risk," Working Paper 1002, Federal Reserve Bank of Cleveland.
    6. Dirk Tasche, 2007. "Capital Allocation to Business Units and Sub-Portfolios: the Euler Principle," Papers 0708.2542, arXiv.org, revised Jun 2008.
    7. Michael B. Gordy, 2002. "A risk-factor model foundation for ratings-based bank capital rules," Finance and Economics Discussion Series 2002-55, Board of Governors of the Federal Reserve System (U.S.).
    8. Nier, Erlend & Yang, Jing & Yorulmazer, Tanju & Alentorn, Amadeo, 2008. "Network models and financial stability," Bank of England working papers 346, Bank of England.
    9. Xin Huang & Hao Zhou & Haibin Zhu, 2009. "A framework for assessing the systemic risk of major financial institutions," Finance and Economics Discussion Series 2009-37, Board of Governors of the Federal Reserve System (U.S.).
    10. Michael Boss & Gerald Krenn & Claus Puhr & Martin Summer, 2006. "Systemic Risk Monitor: A Model for Systemic Risk Analysis and Stress Testing of Banking Systems," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 11, pages 83-95.
    11. Lehar, Alfred, 2005. "Measuring systemic risk: A risk management approach," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2577-2603, October.
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