Bank Systemic Risk Research Articles

Multi-Dimensional Factor Correlation, Multiple Interbank Network Contagion, and Conditional VaR of Banks

The systemic risk of banks is a multi-dimensional factor correlation and multi-interbank contagion, forming a multi-dimensional multi-correlation (MDMC) contagion risk. After superposition, the multiplier effect magnifies the destructive power of a single impact. In this study, the weighted average method is used to integrate the four interbank contagion paths of jump-diffusion, interbank lending, stock price information, and common assets, establish the multi-level interbank contagion matrix, apply the quantile estimation of the spatial Dubin panel model, estimate the MDMC infectious bank conditional risk value, and decompose and identify the systemically important risk factors, systemically important banks, and systemically vulnerable banks. The following conclusions were drawn. First, the superposition contagion effect of MDMC networks is significant. Second, the systemic importance of default risk, interest rate risk, liquidity risk, and the GDP growth rate of the banking industry is high, followed by changes in stock market returns and investor sentiment. Third, the four major state-owned banks have an MDMC network contagion effect, which has the characteristics of systemic importance and vulnerability.

An asymptotic study of systemic expected shortfall and marginal expected shortfall

Following recent studies of systemic risk in banking, finance, and insurance, we quantify systemic expected shortfall (SES) and marginal expected shortfall (MES) in a general context of quantitative risk management and link them to a confidence level q∈(0,1). For this purpose, we consider a system comprising multiple individuals (sub-portfolios, lines of business, or entities) whose loss-profit variables are modeled by randomly weighted random variables so that both their tail behavior and the interdependence among them are captured. For the case of heavy-tailed losses, we derive general asymptotic formulas for the SES and MES as q↑1. If restricted to the special case in which the losses have equivalent regularly varying tails, the obtained formulas are further simplified and explicitized into the value at risk of a representing random variable. Numerical studies are conducted to examine the performance of these asymptotic formulas.

Spillover effects of banking systemic risk on firms in China: A financial cycle analysis

This paper investigates the spillover effects of banking sector risk on firms in China and explores the risk transmission channels from the perspective of financial cycle. We use the banking risk-taking and systemic risk as the proxies of financial booms and busts. Our study yields four main findings. First, the banking risk-taking reduces firm risk in financial booms. Higher financing costs and constraints, larger firm size and financing scale, and state ownership inhibit the spillover effects. Second, the banking systemic risk increases firm risk during financial busts. Higher financing costs and constraints, larger firm size and financing scale, and state ownership facilitate the spillover effects. Third, the magnitudes of banking risk spillovers vary across industries, and this effect is more pronounced in the manufacturing industry. Fourth, bank risk-taking affects firm risk differently through various channels in different leading periods. When leading 1 to 3quarters, banking risk-taking reduces firm risk, and channel variables inhibit the spillover effects. However, when leading 4 to 8 quarters, the rising bank risk-taking eventually increases firm risk, and channel variables amplify its spillover effects. Our study offers important policy implications for risk assessment and mitigation in the Chinese loan market.

Examining the interconnectedness and early warning signals of systemic risks of shadow banks: an application to the Indian shadow bank crisis

PurposeThe paper models the financial interconnectedness and systemic risk of shadow banks using Granger-causal network-based measures and takes the Indian shadow bank crisis of 2018–2019 as a systemic event.Design/methodology/approachThe paper employs pairwise linear Granger-causality tests adjusted for heteroskedasticity and return autocorrelation on a rolling window of weekly returns data of 52 financial institutions from 2016 to 2019 to construct network-based measures and calculate network centrality. The Granger-causal network-based measure ranking of financial institutions in the pre-crisis period (explanatory variable) is rank-regressed with the ranking of financial institutions based on maximum percentage loss suffered by them during the crises period (dependent variable).FindingsThe empirical result demonstrated that the shadow bank complex network during the crisis is denser, more interconnected and more correlated than the tranquil period. The closeness, eigenvector, and PageRank centrality established the systemic risk transmitter and receiver roles of institutions. The financial institutions that are more central and hold prestigious positions due to their incoming links suffered maximum loss. The shadow bank network also showed small-world phenomena similar to social networks. Granger-causal network-based measures have out-of-sample predictive properties and can predict the systemic risk of financial institutions.Research limitations/implicationsThe study considers only the publicly listed financial institutions. Also, the proposed measures are susceptible to the size of the rolling window, frequency of return and significance level of Granger-causality tests.Practical implicationsSupervisors and financial regulators can use the proposed measures to monitor the development of systemic risk and swiftly identify and isolate contagious financial institutions in the event of a crisis. Also, it is helpful to policymakers and researchers of an emerging economy where bilateral exposures' data between financial institutions are often not present in the public domain, plus there is a gap or delay in financial reporting.Originality/valueThe paper is one of the first to study systemic risk of shadow banks using a financial network comprising of commercial banks and mutual funds. It is also the first one to study systemic risk of Indian shadow banks.

The Global Shadow Bank–Systematic Risk and Tax Policy Objectives: The Uncertain Case of Foreign Hedge Fund Lending to U.S. Borrowers and Transacting in U.S. Debt Securities

The structure of the global financial system has drastically changed in the last few decades with the rise of what has been called a shadow banking system. The term “shadow banking system” refers to the fact that financial institutions outside the traditional banking system have acted as intermediaries between investors and borrowers and have increasingly undertaken roles traditionally played by banks, including lending capital to U.S. businesses. These intermediaries have included investment banks, hedge funds, and others that have expanded liquidity in many global financial markets, arguably increasing market efficiency.

Determinants Analysis of Islamic and Conventional Banks Systemic Risk Potentiality: A Preliminary Study

Abstract This study aims to analyze the determinants of systemic risk in Islamic and conventional banks. The population of this research is Islamic and conventional banks, which are listed on the Indonesia Stock Exchange. Researchers used purposive sampling to ensure the suitability of the sample with the research objectives. Furthermore, we use secondary data obtained from financial databases such as Yahoo Finance and the Indonesia Stock Exchange. This study adopts the systemic risk measurement offered by Fiordelisi and Marquez-Ibanez (2013). The determinants of systemic risk were explored from the six independent variables, namely the bank efficiency, business model, size, interest rate, GDP, and bank categories (Islamic or conventional). Data analysis was performed with panel data regression. The results indicate that size is the critical factor in determining potential systemic risk for banks, both Islamic and conventional banks. This study contributes theoretically in constructing theoretical frameworks related to the stability and resilience of Islamic banks in comparison with conventional banks. Practically this study seeks to produce recommendations for improvement of Islamic banking financial governance as an alternative to conventional banking.

Shadow banking and commercial bank: evidence from China

ABSTRACT In China, commercial banks participate in shadow banking activities through interbank or channel businesses, which should be called bank’s shadow banking activities. Based on the co-opetition game model, we first analyse the fund flow mechanism between bank’s shadow banking and traditional credit business, which confirms that the greater the proportion of bank’s shadow banking investment, the higher the bank profit. By sampling 147 commercial banks in China during 2003 to 2019, we empirically study the impact of bank’s shadow banking on the individual risk of commercial bank by OLS regression and on the systemic risk of banks through the randomized effect model from the micro-level. The results confirm that Chinese bank’s shadow banking will increase the individual operating risk of commercial bank and its rapid development will increase the probability of banking system risk. Meanwhile, we find that global financial crisis has no significant effect on the risk of individual banks or banking systems, but the regulatory overhaul of bank’s shadow banking activities can significantly inhibit the individual bank’s operational risk, especially for listed banks.

Bank Consolidation and Systemic Risk: M&A During the 2008 Financial Crisis

Bank Consolidation and Systemic Risk: M&A During the 2008 Financial Crisis

Market power and bank systemic risk: Role of securitization and bank capital

We examine how market power in the run-up to the 2007–2009 crisis affected banks’ systemic risk during the crisis, and whether this effect was influenced by two key factors: securitization and bank capital. Using a sample of the largest listed banks from 15 countries, we find that more market power prior to the crisis is connected to larger levels of realized systemic risk during the crisis. The use of securitization exacerbated the effect of market power on systemic risk, while capitalization partially mitigated it.

Identifying Systemically Important Banks in Indonesia: CoVaR Approach

The Global Financial Crisis of 2008 had a significant impact on banks' bailout decisions due to its high cost of Rp. 6.76 trillion (USD 499.5 million). That shifted the focus from analyzing bank size to a broader notion of systemic risk. Therefore, this research aims to systemically identify important banks in Indonesia using Conditional Value-at-Risk (CoVaR) approach. We conduct the following three steps measurement for population-based on all commercial banks data. Firstly, this study uses Merton Model to gauge the probability of default of commercial banks. Secondly, this study quantifies the value at risk of each bank, including its contribution to the whole banking systemic risk. Finally, this study measures financial linkage among banks and the individual bank value at risk contribution, conditional on other banks being in financial distress, i.e., at its Value at Risk (ΔCoVaR A|B). A threshold of 20% ΔCoVaR (A|B) was used to determine 12 out of 119 Indonesian commercial banks that are systemically important and the size ability to affect CoVaR positively. The novelty of the research is to integrate Probability of Default derived from the Merton Model into the CoVaR Model developed by Adrian & Brunnermeier.

Discussion of ‘Moving toward the expected credit loss model under IFRS 9: Capital Transitional Arrangement and bank systematic risk'

Discussion of ‘Moving toward the expected credit loss model under IFRS 9: Capital Transitional Arrangement and bank systematic risk'

Bank Sectoral Concentration and Risk: Evidence from a Worldwide Sample of Banks

AbstractWe propose a novel, stock‐return based, technique to measure three aspects of banks' sectoral concentration that feature prominently in episodes of bank risk: specialization (capturing high exposures), differentiation (capturing deviation from peer banks), and financial sector exposure (capturing direct connectedness) and show external validity for these measures. We find that both individual and systemic bank risk decrease with specialization. Differentiation is particularly and positively related to individual bank risk, whereas direct connectedness of banks is particularly and positively related to systemic bank risk. These findings inform the theoretical and policy debate on the relationship between sectoral concentration and banks' stability.

Does macroprudential policy alleviate the adverse impact of COVID-19 on the resilience of banks?

This paper examines the resilience of banks as perceived by market participants during the COVID-19 crisis. We analyse how bank stock returns during January–March 2020 relate to the pre-crisis activation of macroprudential policy across 52 countries in a cross-sectional dimension. We find that, overall, a tighter macroprudential policy stance is beneficial for bank systemic risk, as assessed by equity market investors. A robust finding is that a perceived decrease in bank risk stems primarily from the use of credit growth limits, reserve requirements, and dynamic provisioning. By contrast, a pre-crisis build-up of capital surcharges on systemically important financial institutions seems to lower bank stock returns. Alternative bank risk indicators suggest that the latter is likely to be driven by concerns about profits rather than the probability of default.

Measurement of Systemic Risk in the Colombian Banking Sector

This paper uses three methodologies for measuring the existence of systemic risk in the Colombian banking system. The determination of its existence is based on implementing three systemic risk measures widely referenced in academic works after the subprime crisis, known as CoVaR, MES and SRISK. Together, the three methodologies were implemented for the case of Colombian Banks during the 2008–2017 period. The findings allow us to establish that the Colombian banking sector did not present a systemic risk scenario, despite having suffered economic losses due to external shocks, mainly due to the subprime crisis. The results and findings show the efficiency of the systemic risk measures implemented in this study as an alternative to measure systemic risk in banking systems.

Credit Asset Securitization, Cross Holdings, and Systemic Risk in Banking

Credit Asset Securitization, Cross Holdings, and Systemic Risk in Banking

Economic Policy Uncertainty and Bank Systemic Risk: A Cross-Country Analysis

Economic Policy Uncertainty and Bank Systemic Risk: A Cross-Country Analysis

Economic Policy Uncertainty and Bank Systemic Risk: A Perspective of Risk Decomposition

Economic Policy Uncertainty and Bank Systemic Risk: A Perspective of Risk Decomposition

CEO Social Connections and Bank Systemic Risk, the “Dark Side” of Social Networks

CEO Social Connections and Bank Systemic Risk, the “Dark Side” of Social Networks

Borrower- and Lender-Based Macroprudential Policies: What Works Best Against Bank Systemic Risk?

Borrower- and Lender-Based Macroprudential Policies: What Works Best Against Bank Systemic Risk?

A model-based approach for estimation of liquidity risk of joint-stock commercial banks in Vietnam

The research attempts to identify the factors affecting liquidity risk of the joint-stock commercial banking system in Vietnam in the period 2008-2018. The research uses regression methods for panel data with a sample of 26 commercial banks, using secondary data collected from audited financial statements of commercial banks in Vietnam. The study performed FEM, REM, FGLS and D&K regression estimations and model’s tests. Through the SGMM method for panel data, the results show the liquidity risk of the previous year (LIQR), the liquidity of commercial banks (LIQ), the variable of the loan/total assets ratio (LTA), the ratio of credit growth (CRD), external financing ratio (EFD), credit risk provision ratio (LLP) have a positive impact on credit risk. In addition, the research results have not found statistically significant evidence on the factors of economic growth, inflation, money supply, the financial crisis affecting the liquidity risk in the case of Vietnam. This suggests important policy implications for commercial banks and the State Bank of Vietnam to control liquidity risk and to ensure the stability for the commercial banks in Vietnam.