Abstract
Highly concentrated banking system risks and the cumulative effect due to their accumulation act as a driver for improving the macro-prudential policy implemented by central banks. For this reason, an effectively and comprehensively assessed systemic risk in the banking system is declared an express condition for the early detection of its production sources and blocking of potential spreading channels, reducing the possible implementation. In light of this, the article develops an approach to the aggregated systemic risk assessment and interpretation of its results. The proposed approach is based on the considered influence exerted by financial risks of systemically important banks on the destabilized banking system and interconnections between banks in the context of the possible crisis impulse spreading. The following steps should be accomplished to form an aggregated systemic risk indicator in the banking system. Firstly, the differentiation of systemically important banks by the degree of their systemic importance; secondly, an integral assessment of the bank operation riskiness within certain bank groups; thirdly, the cumulative composition of the corresponding integral indicators, taking into account their weighting coefficients based on two criteria, namely values of the systemic importance indicator differentiating the bank groups, and the correlation of their risks. Interpreting the quantitative measurement results with regard to the systemic risk in the banking system is followed by the recommendations below: the systemic risk grading into high, medium and low levels and the respective definition of the threshold aggregated systemic risk indicator value which informs about the possible systemic crisis when approached; justification of the selected supervision regime types (strengthened, moderate or weakened) for systemically important banks, depending on the riskiness level specific for their operation and the systemic importance degree. The developed approach to measuring the systemic risk by means of constructing an aggregated indicator and interpreting the obtained results was being tested considering the financial risk indicators of the systemically important banks in Ukraine during 2009–2018.
Highlights
The banking system, as well as the entire financial system, are prone to producing risks that spread rapidly to other economy sectors
The interpretation of the systemic first direction is based on recognizing the spill- risk assessment results needs to be enhanced, as, overs in the banking system, and the second direction takes into risk
It has been proposed to measure the systemic risk in the banking system with the formation of an aggregated indicator by convoluted integral operation riskiness indicators for systemically important banks, divided into groups depending on their systemic importance
Summary
The banking system, as well as the entire financial system, are prone to producing risks that spread rapidly to other economy sectors. When comparing the results of these (CISS); Ivanets (2017) – evaluating the systemic methods, Huang et al (2015) revealed discreprisk index as an integrated financial stability in- ancies in the obtained bank ratings formed acdicator; Dumičić (2016) – formation of the accu- cording to their systemic risk contributions It mulation and consequence (or materialization) is worth bringing a focus on the existing indexes of the systemic risk and their aggrega- restrictions related to the use of certain methtion into the overall systemic risk index; Dungey ods (in particular, the complexity of calculations et al (2018) – developing the dynamic systemic using estimated parameters and market data at risk index, taking into account the links among different development levels of financial marthe risks faced by financial institutions. The interpretation of the systemic first direction is based on recognizing the spill- risk assessment results needs to be enhanced, as, overs in the banking system (the infection risk, for example, it is mostly reduced to the deterthat is, the risk spreading from one bank to the mination of bank contributions to the systemic other ones), and the second direction takes into risk (through their contributions to the banking account the influence exerted by banks on sys- system losses under certain stressful conditions temic shocks. Van Oordt and Zhou (2015) and to the relationships between banking instisummarize two components while introducing tutions respectively) within the scope of the first the systemic risk assessment proposals: the first and second approaches
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