DP19727 Systemic Risk Measures: From the Panic of 1907 to the Banking Stress of 2023
We assess the efficacy of market-based systemic risk measures that rely on U.S. financial
firms’ stock return co-movements with market- or sector-wide returns under stress from 1895
to 2023. Stress episodes are identified using corporate bond spread widening and narrative
dating, spanning from the Panic of 1907 to the Banking Stress of 2023. Measures observed
prior to the onset of stress episodes predict market outcomes (realized volatility and returns),
balance sheet outcomes (lending, profitability, and run risk), and bank failures. Specifically,
the measures are: (i) particularly effective in capturing the cross-sectional ranking of institutions
conditional on a stress episode, rather than aggregate outcomes; (ii) more informative
when stress episodes are severe; and (iii) relevant for both banks and non-bank financial
institutions, although measures incorporating market leverage are especially informative for
banks. A comparative analysis shows that market-based indicators offer information that is
distinct from, and complementary to, traditional balance sheet metrics used in supervisory
and macroprudential risk assessment.
