Systemic Risk Measures and their Viability for Banking Supervision

Abstract

We propose a criteria-based framework to assess the viability of systemic risk measures (SRMs) as a monitoring tool for banking supervision and investigate the determinants of the banking system's overall level of systemic risk. Comparing three prominent SRMs we find that all of them possess substantial forecasting power for banking system distress, however, the measures vary significantly in their predictive accuracy for the state of the real economy. Furthermore, we find that the system-wide market-to-book (MTB) and loan-to-deposit (LTD) ratios act as fundamental drivers of systemic risk. The results have paramount implications. First, the MTB ratio itself may be used as a simple and efficient proxy for the overall systemic tension in the banking system. Second, the systemic relevance of the LTD ratio underlines the critical role of funding liquidity and supports recently proposed regulatory initiatives that curb aggregate liquidity risks. Third, the inclusion of balance sheet data is beneficial for systemic risk measurement.