Abstract
This research examines and compares the performances in terms of systemic risk ranking for three different systemic risk metrics based on daily frequency publicly available data, specifically: Marginal Expected Shortfall (ES), Component Expected Shortfall (CES) and Delta Conditional Value-at-Risk (ΔCoVaR). We compute ΔCoVaR, MES and CES by utilizing EVT principles for modelling marginal distributions and Student’s t copula for describing the dependence structure between every bank and the banking system. Our objective is to attest whether different systemic risk metrics detect the same banks as systemically dangerous institutions with refer to a sample of European banks over the time span 2004-2015. For each bank in the sample we also calculate three traditional market risk measures, like Market VaR, Sharpe’s beta and the correlation between every bank and the banking system (European STOXX 600 Banks Index). Another aim is to explore the existence of a link among systemic risk measures and traditional risk metrics. In addition, the classification results obtained by the different risk metrics are compared with the ranking in terms of systemic riskiness (for European banks) calculated by Financial Stability Board (2015) using end-2014 data and collected in its list of Global Systemically Important Banks (G-SIBs). With refer to the entire sample period, we find a good coherence of ranking results among the three different systemic risk metrics, in particular between CES and ΔCoVaR. Moreover, we find for MES and ΔCoVaR a strong linkage with beta and correlation metrics respectively. Finally, CES metric shows the highest level of concordance with the list of G-SIBs by FSB with refer to European banks.
Highlights
IntroductionThe last global financial crisis highlighted the concepts such as systemic risk and contagion effect and, the need of a macro prudential approach to regulation and supervision on financial institutions, especially cross-border ones
The debate on worldwide financial stability constitutes a key concern for academics and for regulatory authorities and international institutions (International Monetary Fund [IMF], 2009).The last global financial crisis highlighted the concepts such as systemic risk and contagion effect and, the need of a macro prudential approach to regulation and supervision on financial institutions, especially cross-border ones
With refer to the total sample period, we find a good coherence of ranking results among the three different systemic risk measures
Summary
The last global financial crisis highlighted the concepts such as systemic risk and contagion effect and, the need of a macro prudential approach to regulation and supervision on financial institutions, especially cross-border ones. Limiting systemic risk appeared as a possible way to prevent forthcoming systemic financial crises as it allows to contain the domino effect taking down financial institutions one after the other (Basel Committee on Banking Supervision [BCBS], 2010). Consistent with this approach, each institution should have a surplus of capital according to the negative externalities it generates, or in other words in relation to its contribution to the risk of the global financial system. The ranking judgements of the FSB stem from a method founded on balance-sheet figures (BCBS, 2011; 2013)
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