Measuring Systemic Risk

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We present a simple model of systemic risk and we show that each financial institution’s contribution to systemic risk can be measured as its systemic expected shortfall (SES), i.e., its propensity to be undercapitalized when the system as a whole is undercapitalized. SES increases with the institution’s leverage and with its expected loss in the tail of the system’s loss distribution. Institutions internalize their externality if they are “taxed” based on their SES. We demonstrate empirically the ability of SES to predict emerging risks during the financial crisis of 2007-2009, in particular, (i) the outcome of stress tests performed by regulators; (ii) the decline in equity valuations of large financial firms in the crisis; and, (iii) the widening of their credit default swap spreads.
Original languageEnglish
Publication date2012
Publication statusPublished - 2012
EventSwissquote Conference 2012: Liquidity and Systemic Risk - : Ecole Polytechnique Fédérale de Lausanne (EPFL), Lausanne, Switzerland
Duration: 8 Nov 20129 Nov 2012
Conference number: 3


ConferenceSwissquote Conference 2012
Location: Ecole Polytechnique Fédérale de Lausanne (EPFL)
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