Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis

Huang Xin, Hao Zhou and Zhu Haibin

No 296, BIS Working Papers from Bank for International Settlements

Abstract: This paper extends the approach of measuring and stress-testing the systemic risk of a banking sector in Huang, Zhou, and Zhu (2009) to identifying various sources of financial instability and to allocating systemic risk to individual financial institutions. The systemic risk measure, defined as the insurance cost to protect against distressed losses in a banking system, is a summary indicator of market perceived risk that reflects expected default risk of individual banks, risk premia as well as correlated defaults. An application of our methodology to a portfolio of twenty-two major banks in Asia and the Pacific illustrates the dynamics of the spillover effects of the global financial crisis to the region. The increase in the perceived systemic risk, particularly after the failure of Lehman Brothers, was mainly driven by the heightened risk aversion and the squeezed liquidity. Further analysis, which is based on our proposed approach to quantifying the marginal contribution of individual banks to the systemic risk, suggests that “too-big-to-fail” is a valid concern from a macroprudential perspective of bank regulation.

Keywords: systemic risk; Macroprudential regulation; Portfolio distress loss; Credit default swap; Dynamic conditional correlation (search for similar items in EconPapers)
Pages: 47 pages
Date: 2010-01
New Economics Papers: this item is included in nep-ban, nep-reg, nep-rmg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (37)

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Related works:
Journal Article: Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis (2012)
Working Paper: Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis (2009)
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