Paper prepared for the NBER project on “Risks of Financial Institutions”. We benefited from suggestions
and criticism by many participants in the NBER project on “Risks of financial institutions”, in particular by
the organizers Mark Carey (also involving Dean Amel and Allen Berger) and Rene Stulz, by our discussant
Tony Saunders and by Patrick de Fontnouvelle, Gary Gorton, Andy Lo, Jim O’Brien and Eric Rosengren.
Furthermore, we are grateful for comments we received at the 2004 European Finance Association Meetings
in Maastricht, in particular by our discussant Marco da Rin and by Christian Upper, at the 2004 Ottobeuren
seminar in economics, notably the thoughts of our discussant Ernst Baltensberger, of Friedrich Heinemann
and of Gerhard Illing, as well as at seminars of the Max Planck Institute for Research on Collective Goods,
the Federal Reserve Bank of St. Louis, the ECB and the University of Frankfurt. Gabe de Bondt and David
Marques Ibanez supported us enormously in finding yield spread data, Lieven Baele and Richard Stehle
kindly made us aware of pitfalls in Datastream equity data. Very helpful research assistance by Sandrine
Corvoisier, Peter Galos and Marco Lo Duca as well as editorial support by Sabine Wiedemann are gratefully
acknowledged. Any views expressed only reflect those of the authors and should not be interpreted as the
ones of the ECB or the Eurosystem. The views expressed herein are those of the author(s) and do not
necessarily reflect the views of the National Bureau of Economic Research.
This paper derives indicators of the severity and structure of banking system risk from asymptotic
interdependencies between banks’ equity prices. We use new tools available from multivariate
extreme value theory to estimate individual banks’ exposure to each other (“contagion risk”) and to
systematic risk. Moreover, by applying structural break tests to those measures we study whether
capital markets indicate changes in the importance of systemic risk over time. Using data for the
United States and the euro area, we can also compare banking system stability between the two
largest economies in the world. Finally, for Europe we assess the relative importance of cross-border
bank spillovers as compared to domestic bank spillovers. The results suggest, inter alia, that systemic
risk in the US is higher than in the euro area, mainly as cross-border risks are still relatively mild in
Europe. On both sides of the Atlantic systemic risk has increased during the 1990s
