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Distress Dependence And Financial Stability

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Executive Summary

This paper defines a set of systemic financial stability indicators which measure distress dependence among the financial institutions in a system, thereby allowing to analyze stability from three complementary perspectives: common distress in the system, distress between specific banks, and cascade effects associated with a specific bank. The approach defines the banking system as a portfolio of Banks and infers the System's Multivariate Density (BSMD) from which the proposed measures are estimated. The BSMD embeds the banks' default inter-dependence structure that captures linear and non-linear distress dependencies among the banks in the system and its changes at different times of the economic cycle.

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