Are Banks too Big to Fail? Measuring Systemic Importance of Financial Institutions

We consider three measures on the systemic importance of an individual financial institution within a interconnected financial system. Based on the measures, we study the relation between the size of a financial institution and its systemic importance. From both theoretical models and empirical analysis, we find that in analyzing the systemic risk posed by one financial institution to the financial system, size should not be considered as a proxy of systemic importance. In other words, the "too big to fail" argument is not always valid when analyzing the systemic importance of a financial institution. For macro-prudential supervision, it is thus necessary to consider the systemic importance measures of financial institutions.