Systemic Risk Exposures: A 10-by-10-by-10 Approach

Darrell Duffie

Chapter in NBER book Risk Topography: Systemic Risk and Macro Modeling (2014), Markus Brunnermeier and Arvind Krishnamurthy, editors (p. 47 - 56)
Conference held April 28, 2011
Published in August 2014 by University of Chicago Press
© 2014 by the National Bureau of Economic Research

This chapter presents and discusses a "10-by-10-by-10" network-based approach to monitoring systemic financial risk. Under this approach, a regulator would analyze the exposures of a core group of systemically important financial firms to a list of stressful scenarios, say 10 in number. For each scenario, about 10 such designated firms would report their gains or losses. Each reporting firm would also provide the identities of the 10 counterparties with whom the gain or loss for that scenario is the greatest in magnitude relative to all counterparties. The gains or losses with each of those 10 counterparties would also be reported, scenario by scenario, measured in terms of market value and also in terms of cash flow, allowing regulators to assess risk magnitudes in terms of stresses to both economic values and also liquidity. Exposures would be measured before and after collateralization. One of the scenarios would be the failure of a counterparty. The "top ten" counterparties for this scenario would therefore be those whose defaults cause the greatest losses to the reporting firm. The number "10" is, thoughout, arbitrary.

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This paper was revised on March 17, 2016

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This chapter first appeared as NBER working paper w17281, Systemic Risk Exposures: A 10-by-10-by-10 Approach, Darrell Duffie
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