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How to Calculate Systemic Risk Surcharges

How to Calculate Systemic Risk Surcharges

Chapter:
(p.175) 5 How to Calculate Systemic Risk Surcharges
Source:
Quantifying Systemic Risk
Author(s):
Viral V. AcharyaLasse H. PedersenThomas PhilipponMatthew Richardson
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226921969.003.0007

This chapter analyzes a scheme to charge financial firms for their systemic risk contributions, based on the price of their contingent capital insurance. It provides an explicit calculation formula for contingent capital insurance and illustrates how the systemic risk surcharge varies with institution size, its leverage, risk (equity volatility), and, importantly, its correlation with rest of the economy or with the systemically important part of the financial sector. Calculations of both the tax and the insurance premium for major financial firms prior to the 2007 financial crisis show that the measure accurately chose the systemic firms, consistent with recent statistical-based measures of systemic risk. A commentary is also included at the end of the chapter.

Keywords:   systemic risk contributions, contingent capital insurance, financial firms, financial crisis

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