Description: We provide a measure of systemic risk in the US financial services industry, which captures the risk of widespread insolvency in the banking system.
What ADD tells you: ADD (average distance-to-default) captures insolvency risks for major individual banking institutions. Falling ADD indicates that the market’s perception of average insolvency risk is rising.
What PDD tells you: PDD (portfolio distance-to-default) captures insolvency risk for the banking system as a whole. Falling PDD indicates that the market’s perception of insolvency risk is rising for the banking system as a whole.
When is systemic risk high? When the spread between ADD and PDD is close to zero, it indicates that all major banks included in the index are stressed by the same factor, which means that systemic risk is high.