Financial crisis probability measurement model

Abstract

Methods. The research used the method of analysis and synthesis – to clarify the nature of modern financial crises, the method of grouping – to determine the types of financial crises, general and specific – to differentiate between different types of financial crises, econometric methods – to quantify the level of systemic risk in the financial sector that leads to the financial crisis. Results. Excessive credit growth, the main cause of financial crises, is reflected in the insufficient capitalization of the financial sector. The paper briefly reviews the theoretical and empirical studies on the developments in these markets around the financial crisis. Market-based measures of systemic risk, such as SRISK, which stands for systemic risk, allow monitoring of how such vulnerabilities emerge and progress in real time. Novelty. This paper presents a quantitative assessment of the level of systemic risk in the financial sector that leads to a financial crisis. The model builds on the theory that deleveraging will have a price impact and the greater the magnitude of the deleveraging, the more dangerous the adjustment. In its most extreme case, the real economy has restricted access to credit as the financial sector experiences a fire sale, thus endogenously generating a financial crisis. Practical value. In an econometric framework, the relationship between SRISK and severity of financial crisis for different developed countries is given. The paper focuses on financial crises characterized by disruptions in credit supply, the lower tail of which may be related to various factors. A report on the probability of a financial crisis is provided in real-time from an indication of excessive credit growth. The study shows the important role of the cross-border external effect of financial noncapitalization.