Systemic Risk Exposures: A 10-by-10-by-10 Approach

Darrell Duffie

No 17281, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Here, I present and discuss a "10-by-10-by-10" network-based approach to monitoring systemic financial risk. Under this approach, a regulator would analyze the exposures of a core group of systemically important financial firms to a list of stressful scenarios, say 10 in number. For each scenario, about 10 such designated firms would report their gains or losses. Each reporting firm would also provide the identities of the 10, say, counterparties with whom the gain or loss for that scenario is the greatest in magnitude relative to all counterparties. The gains or losses with each of those 10 counterparties would also be reported, scenario by scenario. Gains and losses would be measured in terms of market value and also in terms of cash flow, allowing regulators to assess risk magnitudes in terms of stresses to both economic values and also liquidity. Exposures would be measured before and after collateralization. One of the scenarios would be the failure of a counterparty. The "top ten" counterparties for this scenario would therefore be those whose defaults cause the greatest losses to the reporting firm. In eventual practice, the number of reporting firms, the number of stress scenarios, and the number of major counterparties could all exceed 10, but it is reasonable to start with a small reporting system until the approach is better understood and agreed upon internationally.

JEL-codes: G01 G28 G32 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-reg and nep-rmg
Note: AP
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Citations: View citations in EconPapers (13)

Published as Systemic Risk Exposures: A 10-by-10-by-10 Approach , Darrell Duffie. in Risk Topography: Systemic Risk and Macro Modeling , Brunnermeier and Krishnamurthy. 2014

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Chapter: Systemic Risk Exposures: A 10-by-10-by-10 Approach (2013)
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