Abstract
In this paper, we measure the systemic risk with a novel methodology, based on a “spatial-temporal” approach. We propose a new bank systemic risk measure to consider the two components of systemic risk: cross-sectional and time dimension. The aim is to highlight the “time-space dynamics” of contagion, i.e., if the CDS spread of bank i depends on the CDS spread of other banks. To do this, we use an advanced spatial econometrics design with a time-varying spatial dependence that can be interpreted as an index of the degree of cross-sectional spillovers. The findings highlight that the Eurozone banks have strong spatial dependence in the evolution of CDS spread, namely the contagion effect is present and persistent. Moreover, we analyse the role of the European Central Bank in managing contagion risk. We find that monetary policy has been effective in reducing systemic risk. However, the results show that systemic risk does not imply a policy intervention, highlighting how financial stability policy is not yet an objective.
Highlights
In the last decade, the systemic risk concept is back in the limelight
This implies that the Eurozone banks are strong spatial dependence in the evolution of CDS spread, namely the contagion effect is present
Based on a recent study, this section addresses two main questions: (i) What are the shadow channels through which monetary policy has an effect on contagion? (ii) Has financial stability become an objective of the ECB’s policy? We extend the analysis of Colletaz et al (2018), so as to study the “new” effects of monetary policy during and after the crisis
Summary
The systemic risk concept is back in the limelight. Systemic risk is generally manifested as a series of related defaults that trigger the withdrawal of liquidity and the loss of belief in the financial system as a whole (Benoit et al (2017)). To properly assess systemic risk, it is essential to identify the largest financial institutions—“too big to fail” (TBTF)—and consider the interconnections between them: in this case, we are talking about “too interconnected to fail” (TITF). Many methodologies have recently been implemented to quantify the contribution of individual financial institutions to systemic risk, for example, the CoVaR (Conditional Value-at-Risk) proposed by Adrian and Brunnermeier (2016), MES
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