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Measuring the systemic importance of interconnected banks

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  • Drehmann, Mathias
  • Tarashev, Nikola

Abstract

We propose a method for measuring the systemic importance of interconnected banks. In order to capture contributions to system-wide risk, our measure accounts fully for the extent to which a bank (i) propagates shocks across the system and (ii) is vulnerable to propagated shocks. An empirical implementation of this measure and a popular alternative reveals that interconnectedness is a key driver of systemic importance. However, since the two measures reflect the impact of interbank borrowing and lending on system-wide risk differently, they can disagree substantially about the systemic importance of individual banks.

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  • Drehmann, Mathias & Tarashev, Nikola, 2013. "Measuring the systemic importance of interconnected banks," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 586-607.
    • Handle: RePEc:eee:jfinin:v:22:y:2013:i:4:p:586-607
    DOI: 10.1016/j.jfi.2013.08.001
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