Systemic Risk Contributions: A Credit Portfolio Approach

38 Pages Posted: 1 Mar 2011 Last revised: 11 Nov 2011

Date Written: March 1, 2011

Abstract

We put forward a Merton-type multi-factor portfolio model for assessing banks' contributions to systemic risk. This model accounts for the major drivers of banks' systemic relevance: size, default risk and correlation of banks' assets as a proxy for interconnectedness. We measure systemic risk in terms of the portfolio expected shortfall (ES). Banks' (marginal) risk contributions are calculated based on partial derivatives of the ES in order to ensure a full risk allocation among institutions. We compare the performance of an importance sampling algorithm with a fast analytical approximation of the ES and the marginal risk contributions. Furthermore, we show empirically for a portfolio of large international banks how our approach could be implemented to compute bank-specific capital surcharges for systemic risk or stabilisation fees. We find that size alone is not a reliable proxy for the systemic importance of a bank in this framework. In order to smooth cyclical fluctuations of the risk measure, we explore a time-varying confidence level of the ES.

Keywords: Systemic Risk Contribution, Systemic Capital Charge, Expected Shortfall, Importance Sampling, Granularity Adjustment

JEL Classification: C15, C63, E58, G01, G21

Suggested Citation

Tente, Natalia and Düllmann, Klaus, Systemic Risk Contributions: A Credit Portfolio Approach (March 1, 2011). Systemic Risk, Basel III, Financial Stability and Regulation 2011. Available at SSRN: https://ssrn.com/abstract=1773542 or http://dx.doi.org/10.2139/ssrn.1773542

Natalia Tente (Contact Author)

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Klaus Düllmann

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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