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20 Jun 2012    Journal Articles
Wagner, Wolf


Forward-Looking Tail Risk Exposures at U.S. Bank Holding Companies

By Martin Knaup and Wolf Wagner

Abstract
This paper develops a simple method for quantifying banks’ exposures to large (negative) shocks in a forward-looking manner. The method is based on estimating banks’ share prices sensitivities to (market) put options and does not require the actual observation of tail risk events. We find that estimated (excess) tail risk exposures for U.S. Bank Holding Companies are negatively correlated with their share price beta, suggesting that banks which appear safer in normal periods are actually more crisis prone than their beta would suggest. We also study the determinants of banks’ tail risk exposures and find that their key drivers are uninsured deposits and non-traditional activities that leave assets on banks’ balance sheets.

Forward-Looking Tail Risk Exposures at U.S. Bank Holding Companies