Tail risk and systemic risk of US and Eurozone financial institutions in the wake of the global financial crisis

Abstract

Abstract. We evaluate multiple market-based measures for US and eurozone individual bank tail risk and banksystemic risk. We apply statistical extreme value analysis to the tails of bank equity capital losses to estimate the likelihood of individual institutions' financial distress as well as individual banks' exposure to each other ("contagion risk") and to global shocks ("extreme systematic" risk). The estimation procedure presupposes that bank equity returns are "heavy tailed" and "tail dependent" as identifying assumption. We also assess to what extent magnitudes of tail risk and systemic risk have been altered by the global financial crisis. Using both US and eurozone banks allows one to make a cross-atlantic comparison of the financial systems' riskiness and financial stability. For Europe we assess the relative importance of cross-border bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that both tail risk and systemic risk in the US are higher than in the eurozone. We cannot generally conclude that domestic eurozone spillover risk dominates cross-border eurozone spillover risk. Finally, tail risk and systemic risk have increased over time on both sides of the Atlantic.

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