Even a 1% shock is significant
Duarte & Eisenbach ’13 (Fernando Duarte – PhD in Economics @ MIT, Economist @ the Federal Reserve Bank of New York, specializes in asset pricing and monetary economics. Thomas M. Eisenbach. “Fire-Sale Spillovers and Systemic Risk,” October 2013, https://www.newyorkfed.org/medialibrary/media/research/conference/2013/fire_sales/Paper_Duarte_Eisenbach.pdf)
We construct a new systemic risk measure that quantifies vulnerability to firesale spillovers using detailed regulatory balance sheet data for U.S. commercial banks and repo market data for broker-dealers. Even for moderate shocks in normal times, fire-sale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in 2013-Q1 produces fire sale externalities equal to 10 percent of system equity. For broker-dealers, a 0.1 percent shock to assets in August 2013 generates spillover losses equivalent to almost 6 percent of system equity. Externalities during the last financial crisis are between two and three times larger. Our systemic risk measure reaches a peak in the fall of 2008 but shows a notable increase starting in 2005, ahead of many other systemic risk indicators. Although the largest banks and broker-dealers produce – and are victims of – most of the externalities, leverage and “connectedness” of financial institutions also play important roles.