The Case for Case : Estimating Heterogeneous Systemic Effects

The Basel Committee and the Financial Stability Board require a consensus on the identification of characteristics that make a financial institution more prone to be severely hit by systemic shocks. This paper introduces a model for the Conditional Average Systemic Effects (CASE) that can be used to achieve this goal. The CASE quantifies the effect of a system wide shock or market downturn on the profit and loss account of a bank, a firm or on the return of an asset. We propose a linear model for CASE with heterogeneous effects in observable characteristics, which allows researchers to identify the determinants of the vulnerability of a given financial institution and to evaluate counterfactual scenarios to systemic events. We develop bootstrap inference accounting for both estimation and model misspecification risks, and show the utility of our results in Monte Carlo simulations and an empirical application to 100 large U.S. financial firms