Developing a Market-Based Concept of System Risk

This research project develops an operational measure of systemic risk, as an input into the policy process by capturing the interaction of private and governmental sources of systemic risk during and in advance of the crisis.

The crisis has clearly shown the inadequacy of existing risk measures that focus on the safety and soundness of individual institutions and ignore taxpayer exposure to loss through national safety nets. What is needed instead is a measure that can shed light on the interconnectedness of financial institutions, which allows problems at a distant institution to undermine otherwise apparently healthy institutions. This project develops a market-based concept of systemic risk as well as operational indexes to track its behavior across countries and through time.