The Price of Being a Systemically Important Financial Institution (SIFI)

Michel Dacorogna and Marc Busse

MPRA Paper from University Library of Munich, Germany

Abstract: After reviewing the notion of Systemically Important Financial Institution (SIFI), we propose a first principles way to compute the price of the implicit put option that the State gives to such an institution. Our method is based on important results from Extreme Value Theory (EVT), one for the aggregation of heavy tailed distributions and the other one for the tail behavior of the Value-at-Risk (VaR) versus the Tail-Value-at-Risk (TVaR). We show how to value in practice is proportional to the VaR of the institution and thus would provide the wrong incentive to the banks even if not explicitly granted. We conclude with a proposal to make the institution pay the price of this option to a fund, whose task would be to guarantee the orderly bankruptcy of such an institution. This fund would function like an insurance selling a cover to clients.

Keywords: Systemic Risk; "Too Big to Fail"; Risk Measure; Value-at-Risk and Tail Value-at- Risk; Option Price; Risk Neutral Distribution; Heavy tail; Pareto; Insurance (search for similar items in EconPapers)
JEL-codes: C10 E58 E61 (search for similar items in EconPapers)
Date: 2016-06-27
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The Price of Being a Systemically Important Financial Institution (SIFI) (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:75787

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