Systemic Risk and Government Intervention During Financial Crisis: A CoVaR Approach

Abstract

This paper examines the effects of a regulator's crisis management on systemic risk as measured by the delta conditional value-at-risk (CoVaR) during the financial crisis in Japan. We evaluate the various management measures primarily in terms of their liquidity provision/capital infusion effects as well as adverse contagion effects. The findings of the study generally support evidence for the liquidity provision/capital infusion effect, but favor the adverse contagion effect for public fund injection programs with multiple recipients. In addition, the management restrictions accompanying injection programs or the moral hazard with failure resolution might have aggravated the systemic risk. Furthermore, although we confirm that the average systemic risk of the largest banks is higher than that of other banks, we do not necessarily observe the amplified effects of the former on the latter. Lastly, crisis management does not effectively work for the systemic tail risk.