Ranking Systemically Important Financial Institutions

We propose a simple network–based methodology for ranking systemically importantfinancial institutions. We view the risks of firms –including both the financial sectorand the real economy– as a network with nodes representing the volatility shocks. Themetric for the connections of the nodes is the correlation between these shocks. Dailydynamic centrality measures allow us to rank firms in terms of risk connectedness and firmcharacteristics. We present a general systemic risk index for the financial sector. Resultsfrom applying this approach to all firms in the S&P500 for 2003–2011 are twofold. First,Bank of America, JP Morgan and Wells Fargo are consistently in the top 10 throughoutthe sample. Citigroup and Lehman Brothers also were consistently in the top 10 up tolate 2008. At the end of the sample, insurance firms emerge as systemic. Second, thesystemic risk in the financial sector built–up from early 2005, peaked in September 2008,and greatly reduced after the introduction of TARP and the rescue of AIG. Anxiety aboutEuropean debt markets saw the systemic risk begin to rise again from April 2010. Wefurther decompose these results to find that the systemic risk of insurance and deposit–taking institutions differs importantly, the latter experienced a decline from late 2007, inline with the burst of the housing price bubble, while the former continued to climb upto the rescue of AIG