As systemic risk and the discussion over how it can be controlled have come to the fore in the wake of the financial crisis, it has become apparent that risk is more easily measured on a firm level than on the aggregate scale. To this end, a new discussion paper from the Bank of Canada examines two recently-developed methods which central banks can use to measure aggregate credit risk.

The authors appraise a reduced-form model applied to credit default swap (CDS) index tranches, based on