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Quantifying Systemic Risk$
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Joseph G. Haubrich and Andrew W. Lo

Print publication date: 2013

Print ISBN-13: 9780226319285

Published to Chicago Scholarship Online: September 2013

DOI: 10.7208/chicago/9780226921969.001.0001

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How to Calculate Systemic Risk Surcharges

How to Calculate Systemic Risk Surcharges

(p.175) 5 How to Calculate Systemic Risk Surcharges
Quantifying Systemic Risk

Viral V. Acharya

Lasse H. Pedersen

Thomas Philippon

Matthew Richardson

University of Chicago Press

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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