Abstract

http://ssrn.com/abstract=2031798
 
 

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Variation in Systemic Risk at US Banks During 1974-2010


Armen Hovakimian


Baruch College - Zicklin School of Business

Edward J. Kane


Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Luc Laeven


International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)

May 29, 2012


Abstract:     
This paper proposes a theoretically sound and easy-to-implement way to measure the systemic and stand-alone risk of financial institutions using publicly available accounting and stock market data. The measure models the credit enhancement taxpayers provide to individual banks as a put option on bank assets, a tradition that originated with Merton (1974). We extend his contribution by expressing the value of banking-sector losses from systemic default risk as the value of a put option written on a portfolio of aggregate bank assets whose exercise price equals the face value of aggregate bank debt. We conceive of an individual bank’s systemic risk as its contribution to the value of this potential sector-wide put on the financial safety net. To track the interaction of private and governmental sources of systemic risk during and in advance of successive business-cycle contractions, we apply our model to quarterly data over the period 1974-2010. Results indicate that systemic risk reached unprecedented highs during the years 2008-2010, and that bank size, leverage, and asset risk are key drivers of systemic risk.

Number of Pages in PDF File: 54

Keywords: systemic risk, safety net, financial institutions, financial crises

JEL Classification: G21, K23

working papers series





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Date posted: April 1, 2012 ; Last revised: May 29, 2012

Suggested Citation

Hovakimian, Armen and Kane, Edward J. and Laeven, Luc, Variation in Systemic Risk at US Banks During 1974-2010 (May 29, 2012). Available at SSRN: http://ssrn.com/abstract=2031798 or http://dx.doi.org/10.2139/ssrn.2031798

Contact Information

Armen Hovakimian
Baruch College - Zicklin School of Business ( email )
One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)
HOME PAGE: http://faculty.baruch.cuny.edu/ahovakimian/
Edward J. Kane (Contact Author)
Boston College - Department of Finance ( email )
Fulton Hall
Chestnut Hill, MA 02467
United States
520-299-5066 (Phone)
617-552-0431 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Luc A. Laeven
International Monetary Fund (IMF) ( email )
700 19th Street, N.W.
Washington, DC 20431
United States
202-6239020 (Phone)
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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