TY  - JOUR
AU  - Hovakimian,Armen
AU  - Kane,Edward J.
AU  - Laeven,Luc
TI  - Variation in Systemic Risk at US Banks During 1974-2010
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 18043
PY  - 2012
Y2  - May 2012
UR  - http://www.nber.org/papers/w18043
L1  - http://www.nber.org/papers/w18043.pdf
N1  - Author contact info:
Armen Hovakimian
Department of  Economics and Finance
Baruch College Zicklin School of Business
1 Bernard Baruch Way
New York, NY 10010
Tel: 646-312-3490
Fax: 646-312-3451
E-Mail: Armen_Hovakimian@baruch.cuny.edu

Edward J. Kane
2325 E Calle Los Altos
Tucson, AZ 85718
Tel: 520-299-5066
E-Mail: edward.kane@bc.edu

Luc Laeven
Deputy Division Chief
International Monetary Fund
700 19th Avenue, NW
Washington, DC 20431
Tel: 202/623-9020
Fax: 202/623-4740
E-Mail: Llaeven@imf.org
AB  - This paper proposes a theoretically sound and easy-to-implement way to measure the systemic risk of financial institutions using publicly available accounting and stock market data. The measure models credit risk of banks as a put option on bank assets, a tradition that originated with Merton (1974). We extend his contribution by expressing the value of banking-sector losses from systemic default risk as the value of a put option written on a portfolio of aggregate bank assets whose exercise price equals the face value of aggregate bank debt. We conceive of an individual bank’s systemic risk as its contribution to the value of this potential sector-wide put on the financial safety net. To track the interaction of private and governmental sources of systemic risk during and in advance of successive business-cycle contractions, we apply our model to quarterly data over the period 1974-2010.  Results indicate that systemic risk reached unprecedented highs during the years 2008-2010, and that bank size, leverage, and asset risk are key drivers of systemic risk.
ER  -