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Federal Reserve Bank of New York
Staff Reports
Fire-sale spillovers and systemic risk
Fernando M. Duarte
Thomas M. Eisenbach

We reveal and track over time the factors making the financial system vulnerable to fire sales by constructing an index of aggregate vulnerability. The index starts increasing in 2004, before any other major systemic risk measure, more than doubling by 2008. The fire-sale-specific factors of delevering speed and concentration of illiquid assets account for the majority of this increase. Individual banks’ contributions to aggregate vulnerability are an excellent five-year-ahead predictor of SRISK, one of the most prominent systemic risk measures. Had our estimates been available at the time, they would have been a useful early indicator of when and where vulnerabilities were building up.vulnerabilities to fire sales are equally sizable but build up slowly over time. Our measure signals buildup of systemic risk starting in the early 2000s, ahead of many other measures. Our measure also predicts low quantiles of macroeconomic outcomes above and beyond other existing measures, especially at longer horizons.

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Fernando M. Duarte & Thomas M. Eisenbach, Fire-sale spillovers and systemic risk, Federal Reserve Bank of New York, Staff Reports 645, 01 Oct 2013, revised 01 Jun 2018.
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Keywords: systemic risk; fire-sale externalities; leverage; linkage; concentration; bank holding company; tri-party repo market
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