Risk Attribution Using the Shapley Value: Methodology and Policy Applications

We present the Shapley Value as a methodology for risk attribution and use it to derive measures of banks' systemic importance. The methodology possesses attractive properties, such as fairness and efficiency. It also leads naturally to a framework for the analysis of different drivers of systemic importance: bank size, bank-specific risk, and the commonality of banks' exposures. We prove that, all else equal, an increase in bank size leads to a more than proportional increase in systemic importance. We also show how alternative applications of the Shapley Value methodology can be used in designing policy tools with system-wide objectives.