The Use of Systemic Risk Measures in the Indonesian Banking Sector

Abstract

2008 Global Financial Crisis has highlighted the importance of systemic risk, which had been overlooked prior to the crisis. Since then, systemic risk, which focuses on the risk contributions of financial institutions to the whole financial system, has become a necessary complement of idiosyncratic risk, which focuses on the individual risk of each financial institution, within the financial system surveillance framework. Since then, a number of systemic risk measures have been developed to quantify the risk contribution of financial institutions to the financial system. In this paper, we examine the applications of two systemic risk measures, namely Marginal Expected Shortfall (MES) and ∆CoVaR in large Indonesian banks throughout 2008-2015. We further extent our analysis by investigating the practical use of these systemic risk measures in predicting the crisis based on historical data. Our finding reveals that both systemic risk measures can be roughly rationalized in terms of bank-specific and country-specific of the banking sector. We also find that the use of MES is more appropriate compared to ∆CoVaR for systemic risk monitoring due to its relatively better ex-post losses predictability power.