Measuring the systemic importance of interconnected banks

We propose a method for measuring the systemic importance of interconnected banks. In order to capture contributions to system-wide risk, our measure accounts fully for the extent to which a bank (i) propagates shocks across the system and (ii) is vulnerable to propagated shocks. An empirical implementation of this measure and a popular alternative reveals that interconnectedness is a key driver of systemic importance. However, since the two measures reflect the impact of interbank borrowing and lending on system-wide risk differently, they can disagree substantially about the systemic importance of individual banks.