Systemic risk components and deposit insurance premia

Abstract

In light of recent events, there have been proposals to establish a theory of financial system risk management analogous to portfolio risk management. One important aspect of portfolio risk management is risk attribution, the process of decomposing a risk measure into components that are attributed to individual assets or activities. The theory of portfolio risk attribution has limited applicability to systemic risk because systems can have richer structure than portfolios. This article contributes to the theory of systemic risk attribution and illuminates the design process for systemic risk attribution by developing some schemes for attributing systemic risk in an application to deposit insurance.

Keywords:

• Systemic risk
• Risk components
• Risk attribution
• Risk allocation
• Cost allocation
• Deposit insurance

Acknowledgements

This material appears in a FDIC Center for Financial Research working paper (Liu and Staum 2011b). The author thanks discussant Myron Kwast, Rosalind Bennett, Ken Jones, Paul Kupiec, Amiyatosh Purnanandam, and other participants at the 2009 FDIC Center for Financial Research Workshop for their comments, and Matthias Drehmann and Nikola Tarashev for discussions. The views expressed are those of the author. The author gratefully acknowledges support from the FDIC Center for Financial Research and an IBM Faculty Award.