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

Xin Huang, Hao Zhou and Haibin Zhu

Journal of Financial Stability, 2012, vol. 8, issue 3, 193-205

Abstract: This paper measures the systemic risk of a banking sector as a hypothetical distress insurance premium, identifies various sources of financial instability, and allocates 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 macro-prudential perspective of bank regulation.

Keywords: Systemic risk; Macro-prudential regulation; Portfolio distress loss; Credit default swap; Dynamic conditional correlation (search for similar items in EconPapers)
JEL-codes: C13 G21 G28 (search for similar items in EconPapers)
Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (78)

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Related works:
Working Paper: Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis (2010)
Working Paper: Assessing the systemic risk of a heterogeneous portfolio of banks during the recent financial crisis (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:8:y:2012:i:3:p:193-205

DOI: 10.1016/j.jfs.2011.10.004

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