Tracking Variation in Systemic Risk at Us Banks During 1974-2013

56 Pages Posted: 4 May 2012 Last revised: 17 May 2012

See all articles by Armen Hovakimian

Armen Hovakimian

Baruch College - Zicklin School of Business

Edward J. Kane

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

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: May 2012

Abstract

This paper proposes a theoretically based and easy-to-implement way to measure the systemic risk of financial institutions using publicly available accounting and stock market data. The measure models the credit enhancement taxpayers provide to individual banks in the Merton tradition (1974) as a combination put option for the deep tail of bank losses and a knock-in stop-loss call on bank assets. This model expresses the value of taxpayer loss exposure from a string of defaults as the value of this combination option written on the portfolio of industry assets. The exercise price of the call is the face value of the debt of the entire sector. We conceive of an individual bank’s systemic risk as its contribution to the value of this sector-wide option on the financial safety net. To the extent that authorities are slow to see bank losses or reluctant to exercise the call, the government itself becomes a secondary source of systemic risk. We apply our model to quarterly data over the period 1974-2013. The model indicates that systemic risk reached unprecedented highs during the financial crisis years 2008-2009, and that bank size, leverage, and asset risk are key drivers of systemic risk.

Suggested Citation

Hovakimian, Armen and Kane, Edward J. and Laeven, Luc A., Tracking Variation in Systemic Risk at Us Banks During 1974-2013 (May 2012). NBER Working Paper No. w18043. Available at SSRN: https://ssrn.com/abstract=2050833

Armen Hovakimian (Contact Author)

Baruch College - Zicklin School of Business ( email )

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HOME PAGE: http://zicklin.baruch.cuny.edu/faculty-profile/armen-hovakimian/

Edward J. Kane

Boston College - Department of Finance ( email )

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United States
520-299-5066 (Phone)
617-552-0431 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
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Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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