|Accurate measurement of systemic risk is required to efficiently implement financial regulation policies for financial stability. In this paper, we measure systemic risk of Korean banking sector by employing a new method proposed by Suh (2011) which extends existing methods based on option pricing approaches in order to effectively capture realistic features in banks` asset return dynamics and their correlations.12) Merton`s (1974) structural approach considers an equity as a European call option written on a firm`s asset value with the strike price of the matured debt amount. The method employed in this paper also regards an equity as a European call option, but the option is written on the net asset value (i.e., asset value minus debt amount) with the strike price of zero, departing from the usual structural approach. This deviation allows a realistic feature that banks` liabilities (as well as asset) continuously and randomly change because of their role of financial intermediation, while the usual structural approach assumes a fixed debt amount at maturity. The method models individual bank`s net asset value to depend on an observable common factor which is realistically featured with time-varying volatility. This feature enables not only individual bank`s net asset values but also their correlations to have time-varying volatility. Furthermore, it greatly facilitates estimation because the common factor is constructed as an observable variable and therefore allows bank-by-bank estimation. Systemic risk is measured with (i) the proportion of the number of default (or distressed) banks among all banks and (ii) the proportion of the debt amounts of default (or distressed) banks among all banks. We utilize the method to measure s ystemic risk of Korean banking sector from March 1999 to August 2010. The Korean banking sector is populated with ten to twelve banks during the sample period. We found that the Korean banking sector showed a sharp increase in the systemic risk during the recent global financial crisis period. Debt-weighted systemic risk level was lower than equal-weighted systemic risk level, which indicates that large banks are less susceptible to financial distress than small banks. The common factor prove its importance in measuring systemic risk. In particular, ignoring the common factor might lead to significant underestimation of the systemic risk.