Systemic risk contributions: a credit portfolio approach

Research, Preprint OPEN
Düllmann, Klaus ; Puzanova, Natalia (2011)
  • Publisher: Frankfurt a. M.: Deutsche Bundesbank
  • Subject: systemic capital charge | C63 | systemic risk contributions,systemic capital charge,expected shortfall,importance sampling,granularity adjustment | C15 | G21 | E58 | G01 | importance sampling | systemic risk contributions | expected shortfall | granularity adjustment
    • jel: jel:E58 | jel:G01 | jel:C15 | jel:G21 | jel:C63
      ddc: ddc:330

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.
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