A "snapshot" of talk on A New Methodology for Allocating Systemic Risk
Klaus Düllmann and Natalia Puzanova of Deutsche Bundesbank:
Introduction:
• A coherent full-allocation method (Euler allocation) for attributing
systemic risk to individual banks
• Derive and evaluate a fast analytical approximation of marginal risk
contributions
• Use equity market information in order to quantify the dependence
structure underlying system-wide risk
• Apply a time-variant confidence level of the expected shortfall to
mitigate pro-cyclical effects of capital charges for systemic risk
Systemic Risk in the Banking Sector - Definition:
• The risk of a collapse of an entire financial system or market
Structural portfolio model captures three key risk drivers
1 Size:
• Exposure size is defined by the amount of liabilities
• Fraction of liabilities serves as proxy for the losses incurred by
depositors or investors
2 Solvency risk: Captured by banks’ default probabilities
3 Interlinkages
• Captured by a multi-factor asset value model
• Dependence structure in the banking system is represented by the
asset correlation matrix (estimated from stock index returns)
• Systematic risk factors defined by geographical regions
...
Drivers of Systemic Risk
Portfolio perspective: key messages
• The level of the tail risk increases as the individual probabilities of
default rise
• A higher concentration in the financial system, caused either by the
increasing disparity of the relative size of banks or by their
decreasing number, raises systemic risk
• Higher exposure to the common factors (captured by the asset
correlation) increases the likelihood of joint failures and raises the
tail risk
...
Conclusions - Advantages of the modelling approach
• Risk measure ES more in line with a public purse perspective than
the value-at-risk
• Marginal risk contributions – coherent, full risk allocation
• Multi-factor portfolio model – Market-implied dependence structure
and idiosyncratic risk captured
• Numerical implementation: Efficient IS method superior to
analytical approximation for marginal risk contribution in this setting
Policy implications
• Size alone not a reliable proxy for systemic relevance
• Cyclicality of risk contributions can be efficiently mitigated by a
time-varying ES confidence level
• Marginal risk contributions can help to define a capital add-on for
systemic risk or a tax to build up a bank stabilization fund
(Full presentation to be posted when available.)
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