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Systemic Risk Indicator

Announcement

  • Due to a data issue, the 12/31/2020 results are not included in this week’s update. We apologize for the inconvenience. Please check back soon.
  • Description: We provide a measure of systemic risk in the US financial services industry, which captures the risk of widespread stress in the banking system.
  • When is systemic risk high? Systemic risk is measured as the difference, or spread, between the average distance-to-default (ADD) and the portfolio distance-to-default (PDD). Since the year 2000, a spread that is lower than 0.1 for more than two days indicates major financial stress, when average insolvency risk is rising and major banks are stressed by a common factor.
  • What ADD tells you: ADD captures average insolvency risks for a sample of approximately 100 representative banking institutions. Falling ADD indicates that the market’s perception of average insolvency risk is rising.
  • What PDD tells you: PDD captures insolvency risk for a weighted portfolio of the same 100 banking institutions. Falling PDD is another indication that average insolvency risk is rising.
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