The Price of Being a Systemically Important Financial Institution (SIFI)

AuthorMarc Busse,Michel Dacorogna
Date01 December 2017
Published date01 December 2017
The Price of Being a Systemically
Important Financial Institution
DEAR-Consulting, Zurich, Switzerland and
Munich Re, Munich, Germany
After reviewing the notion of Systemically Important Financial Institution, we
propose a rst principles way to compute the price of the implicit put option
that the State gives to such an institution. Our method is based on
important results from extreme value theory, one for the aggregation of
heavy-tailed distributions and the other one for the tail behavior of the value
at risk versus the tail value at risk. We show that the value of the put option is
proportional to the value at risk of the institution and thus would provide the
wrong incentive to banks who are qualied as Systemically Important
Financial Institutions. This wrong incentive exists even if the guarantee is
not explicitly granted. We conclude with a proposal to make the institution
pay the price of this option to a fund, whose task would be to guarantee the
orderly bankruptcy of such an institution. This fund would function like an
insurance selling a cover to clients.
In April 2009, the Financial Stability Board gave a denition of systemic risk in a
report to the G20 (Financial Stability Board 2009):a risk of disruption to nancial
services that is caused by an impairment of all or parts of the nancial system and
that has the potential to cause serious negative consequences for the real
economy.This denitionpaved the way to qualify a certain number of nancial
institutions to be Systemically Important Financial Institutions (SIFIs). Since then,
20 international banks have been designated to be SIFI. Among them, there are
Citibank, JP Morgan, Barclays, HSBC, Deutschebank, BNPParibas, Société
Générale, UBS, Credit Suisse, and all big names of the banking industry. The bank-
ing regulation is in place with Basel II and applies to all banks. However, the debate
is still open to how would the regulation be adapted to the SIFIs. Proposals are
made to tighten the capital requirements and the supervisory process for these in-
stitutions. The academic literature has made few attempts to analyze the market to
detect differences in valuation between normal banks and SIFIs (Merton et al.
2013; Financial Stability Board 2014; Richard and Tracey 2014). Others have
shown that nancial innovations and microprudential regulations can produce
© 2017 International Review of Finance Ltd. 2017
International Review of Finance, 2017
DOI: 10.1111/ir.12115
International Review of Finance, 17:4, 2017: pp. 611–616
DOI: 10.1111/irfi .12115
© 2017 International Review of Finance Ltd. 2017

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