Measuring bank downside systemic risk in Taiwan

Abstract

In this study, both systemic and individual bank risks across domestic and international banks in Taiwan are analyzed given a risk event breakout, using the conditional value-at-risk (CoVaR) and the conditional expected shortfall (CoES) by estimating the bivariate quantile autoregression with asymmetric downside risk adjustment to the daily stock returns of banks. The estimation results reveal the significant external asymmetric downside risk in individual bank systemic risk in contrast to the internal asymmetric downside risk in system itself. The individual bank systemic risk contribution is idiosyncratic and incoherent, but the system risk impact on banks is consistent and co-integrated toward all banks. The empirical results show that the larger size or leverage of the individual banks causes higher system risk impact, as they are hit and go down jointly in shocking events. The foreign banks incur and spread more symmetric external risk, whereas the domestic banks suffer and release more asymmetric external risk. Accordingly, the banks in North America and Europe not only take system risk but contribute the most systemic risk during the subprime crisis and Greek debt crisis, respectively, leading to the episode of asymmetric volatility externality effect on the Taiwanese banks in Asia.