Chapter 13. Systemic Risks

One of the main lessons of the current crisis is that some institutions bear an outstanding risk for the financial system due to their size or special role. During a crisis, these institutions usually get state aid to prevent the whole system from collapsing, which would mean higher costs for the state and the real economy as well. One of the best examples is the AIG. Due to its activity on the CDS market, the Federal Reserve helped the insurer company to avoid defaulting since nobody knew the possible effects of the collapse of the institution.

These lessons motivated central banks and other regulators to put more emphasis on the examination and the regulation of systemically important financial institutions (SIFI). To do this, sophisticated identification of SIFIs is getting more and more important in financial literature. Expanding the former simple techniques, central banks and supervisory authorities tend to use more complicated methodologies based on network...