Abstract
The study examines the systemic risk of banking sector in Pakistan and elucidates the factors that exacerbate the systemic risk taking. First, a systemic risk measure ∆CoVaR is applied to analyze t...
Highlights
The instability of inter-connected financial institution is not confined to that institution but is of contagious nature tending to spread through the financial system and causes severe negative macroeconomic shocks
Adrian and Brunnermeier (2011) introduced ΔCoVaR and define it as the value at risk (VaR) of the system returns conditional on the distress of a financial institution
ΔCoVaR examines the contribution of financial institutions to overall systemic risk, and it can be used to analyze systemic risk of markets
Summary
The instability of inter-connected financial institution is not confined to that institution but is of contagious nature tending to spread through the financial system and causes severe negative macroeconomic shocks. The sub-prime mortgage crises of 2008 highlighted that a shock originating from a single financial institution or country can rapidly extend to other institutions and markets These spillovers were later identified as a materialization of systemic risk and highlighted the need for a better understanding of this phenomenon. The stability of financial system can be maintained by identifying systemically important financial institutions and calibrating regulations according to systemic importance of these institutions (Bernal, Gnabo, & Guilmin, 2014) Consistent with this purview, this study measures systemic risk of financial institutions of Pakistan for the first time incorporating weekly returns (losses) data using conditional value at risk approach (ΔCoVaR). Taking the lead from previous studies (Iqbal et al, 2015; Kleinow & Nell, 2015; Strobl, 2016) an empirical model is developed that includes the most common firm and country characteristics of systemic and idiosyncratic risk. The study outlines important relationships and lays down foundation for introducing micro and macro prudential policies
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