Systemic risk contributions: A credit portfolio approach

We put forward a framework for measuring systemic risk and attributing it to individual banks. Systemic risk is coherently measured as the expected loss to depositors and investors when a systemic event occurs. The risk contributions are calculated so as to ensure a full risk allocation among institutions. Applying our methodology to a panel of 54-86 of the world's major commercial banks for a 13-year time span with monthly frequency not only allows us to closely match the list of G-SIBs; we can also use individual risk contributions to compute bank-specific surcharges: systemic capital charges as well as countercyclical buffers. We therefore address both dimensions of systemic risk - cross-sectional and time-series - in a single integrated approach. As the analysis of risk drivers confirms, the main focus of macroprudential supervision should be on a solid capital base throughout the financial cycle and de-correlation of banks' asset values.

► We provide a coherent method for measurement and full allocation of systemic risk. ► Risk is defined as expected loss to depositors/investors given a systemic event. ► Additive marginal risk contributions make bank's systemic importance measurable. ► Default probabilities drive the risk over time; largest banks contribute the most. ► We suggest an application to bank-specific countercyclical systemic capital charges.