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Fire-Sale Spillovers and Systemic Risk

Presented by: 
TM Eisenbach Federal Reserve Bank of New York
Thursday 28th August 2014 - 11:00 to 11:30
INI Seminar Room 1
Joint with F. Duarte

We construct a new systemic risk measure that quantifies vulnerability to firesale spillovers using detailed regulatory balance sheet data for U.S. commercial banks and repo market data for broker-dealers. Even for moderate shocks in normal times, fire-sale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in 2013-Q1 produces fire sale externalities equal to 19 percent of system capital. For broker-dealers, a 1 percent shock to assets in August 2013 generates spillover losses equivalent to almost 23 percent of system capital. Externalities during the last financial crisis are between two and three times larger. Our systemic risk measure reaches a peak in the fall of 2007 but shows a notable increase starting in 2004, ahead of many other systemic risk indicators. Although the largest banks and broker-dealers produce - and are victims of - most of the externalities, leverage and linkages of financial institutions also play important roles.
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Presentation Material: 
University of Cambridge Research Councils UK
    Clay Mathematics Institute London Mathematical Society NM Rothschild and Sons