Systemic pricing and the real value of banks' liabilities: practical advice for financial managers

Purpose – The paper aims to divulge to the management and the banking community the recent achievements in network-based modelling of systemic risk, which enable the pricing of a bank’s debt in a systemic context. Design/methodology/approach – The paper critiques traditional bank liability pricing methods, which fail to account for the potential risks of financial contagion and systemic crises in the banking industry. It briefly explains the different types of financial contagion and evaluates the effectiveness of network-based valuation models in ensuring consistent pricing of banks' debt. Findings – Traders and financial firms should adopt network-based methods for pricing a bank’s debt to improve their risk and portfolio management. Practical implications – The paper highlights the benefits for financial firms in obtaining systemic pricing of a bank’s liabilities and indicates the practical steps to adopt network-based valuation methods within firms. Social implications – In addition to the private benefits for the institution that adopts network-based valuation methods, the correct pricing of banks' liabilities helps internalise the negative externalities arising from financial contagion, contributing to a more stable and resilient financial system. Originality/value – This paper is the first to aim at bridging the gap between recent theoretical contributions on systemic risk and the customary methods of pricing financial operators' debt.