Variation in Systemic Risk at US Banks During 1974-2010
Baruch College - Zicklin School of Business
Edward J. Kane
Boston College - Department of Finance; National Bureau of Economic Research (NBER)
International Monetary Fund (IMF); Centre for Economic Policy Research (CEPR)
May 29, 2012
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, K23working papers series
Date posted: April 1, 2012 ; Last revised: May 29, 2012
© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo1 in 1.235 seconds