Measuring the tail risks of banks

In order to address the risk of systemic crises it is of paramount importance to have advance information about banks’ exposures to large (negative) shocks. In this paper we develop a simple method for quantifying such exposures 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. Interestingly, we find that estimated 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. 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.