36,271 research outputs found
Systemic risk across sectors; Are banks different?
This research compares systemic risk in the banking sector, the insurance sector, the construction sector, and the food sector. To measure systemic risk, we use extreme negative returns in stock market data for a time-varying panel of the 20 largest U.S. firms in each sector. We find that systemic risk is significantly larger in the banking sector relative to the other three sectors. This result is robust to separating out correlations with an economy-wide stock market index. For the non-banking sectors, the ordering from high to low systemic risk is: insurance sector, construction sector, and food sector. The difference between the insurance sector and the construction sector is no longer significant after correcting for correlations with the economy as a whole. The correction has a large effect for the banking sector and the insurance sector, and a smaller effect for the other two sectors.
Systemic Risk
Governments and international organizations worry increasingly about systemic risk, under which the worldâs financial system can collapse like a row of dominoes. There is widespread confusion, though, about the causes and even the definition of systemic risk, and uncertainty about how to control it. This Article offers a conceptual framework for examining what risks are truly âsystemic,â what causes those risks, and how, if at all, those risks should be regulated. Scholars historically have tended to think of systemic risk primarily in terms of financial institutions such as banks. However, with the growth of disintermediation, in which companies can access capital-market funding without going through banks or other intermediary institutions, greater focus should be devoted to financial markets and the relationship between markets and institutions. This perspective reveals that systemic risk results from a type of tragedy of the commons in which market participants lack sufficient incentive, absent regulation, to limit risk-taking in order to reduce the systemic danger to others. Law, therefore, has a role in reducing systemic risk
Flagship Report on Macro-Prudential Policy in the Banking Sector
European System of Financial Supervisio
Systemic risk in the financial sector; a review and synthesis
In a financial crisis, an initial shock gets amplified while it propagates to other financial intermediaries, ultimately disrupting the financial sector. We review the literature on such amplification mechanisms, which create externalities from risk taking. We distinguish between two classes of mechanisms: contagion within the financial sector and pro-cyclical connection between the financial sector and the real economy. Regulation can diminish systemic risk by reducing these externalities. However, regulation of systemic risk faces several problems. First, systemic risk and its costs are difficult to quantify. Second, banks have strong incentives to evade regulation meant to reduce systemic risk. Third, regulators are prone to forbearance. Finally, the inability of governments to commit not to bail out systemic institutions creates moral hazard and reduces the marketâs incentive to price systemic risk. Strengthening market discipline can play an important role in addressing these problems, because it reduces the scope for regulatory forbearance, does not rely on complex information requirements, and is difficult to manipulate.
Financial Institutions and Systemic Risk: The Case of Bank of America 2006-2017
This paper explores systemic risk and financial institutions before, during, and after the financial crisis. It focuses on Bank of America the 2nd largest bank in the United States by assets. The paper includes an introduction to systemic risk and a review of literature on systemic risk. A few traditional measures of systemic risk will be defined, such as nonperforming loans, return on assets, return on equity, earnings per share, net interest margin, and capital adequacy ratio. Finally, the paper will take a look at how these traditional measures specifically relate to Bank of America from 2006 to 2017. This time period was chosen to show how the risk measures fluctuate before, during, and after the 2008 financial crisis. This crisis is considered by many to be a time when systemic risk was relatively high in the banking sector. This study finds that systemic risk can be evaluated in many different ways. Outside forces also have an impact on systemic risk in the banking environment. Systemic risk is a financial topic that will only increase in importance as financial innovation and globalization continue to evolve
Measures of Systemic Risk
Systemic risk refers to the risk that the financial system is susceptible to
failures due to the characteristics of the system itself. The tremendous cost
of systemic risk requires the design and implementation of tools for the
efficient macroprudential regulation of financial institutions. The current
paper proposes a novel approach to measuring systemic risk.
Key to our construction is a rigorous derivation of systemic risk measures
from the structure of the underlying system and the objectives of a financial
regulator. The suggested systemic risk measures express systemic risk in terms
of capital endowments of the financial firms. Their definition requires two
ingredients: a cash flow or value model that assigns to the capital allocations
of the entities in the system a relevant stochastic outcome; and an
acceptability criterion, i.e. a set of random outcomes that are acceptable to a
regulatory authority. Systemic risk is measured by the set of allocations of
additional capital that lead to acceptable outcomes. We explain the conceptual
framework and the definition of systemic risk measures, provide an algorithm
for their computation, and illustrate their application in numerical case
studies.
Many systemic risk measures in the literature can be viewed as the minimal
amount of capital that is needed to make the system acceptable after
aggregating individual risks, hence quantify the costs of a bail-out. In
contrast, our approach emphasizes operational systemic risk measures that
include both ex post bailout costs as well as ex ante capital requirements and
may be used to prevent systemic crises.Comment: 35 pages, 11 figure
Containing Systemic Risk
Systemic risk refers to the risk of financial system breakdown due to linkages between institutions. This risk cannot be assessed by looking at how individual institutions manage risks but instead requires a full understanding of how the system as a whole operates. At present, the data available to central banks and financial regulators are not at all adequate for the task of assessing systemic risk and the new European Systemic Risk Board needs to address this issue. There is a lot of exciting ongoing research devoted to measuring systemic risk and providing signals to regulators as to when and where they should intervene. However, the tools being developed are still limited in their usefulness. More pressing than the development of these tools is the development and implementation of policy measures to make the financial system more robust. These measures should include higher capital ratios, limits on non-core funding and redesigning financial systems to be less complex.Financial Risk,Systemic Risk,Banking
What is the Minimal Systemic Risk in Financial Exposure Networks?
Management of systemic risk in financial markets is traditionally associated
with setting (higher) capital requirements for market participants. There are
indications that while equity ratios have been increased massively since the
financial crisis, systemic risk levels might not have lowered, but even
increased. It has been shown that systemic risk is to a large extent related to
the underlying network topology of financial exposures. A natural question
arising is how much systemic risk can be eliminated by optimally rearranging
these networks and without increasing capital requirements. Overlapping
portfolios with minimized systemic risk which provide the same market
functionality as empirical ones have been studied by [pichler2018]. Here we
propose a similar method for direct exposure networks, and apply it to
cross-sectional interbank loan networks, consisting of 10 quarterly
observations of the Austrian interbank market. We show that the suggested
framework rearranges the network topology, such that systemic risk is reduced
by a factor of approximately 3.5, and leaves the relevant economic features of
the optimized network and its agents unchanged. The presented optimization
procedure is not intended to actually re-configure interbank markets, but to
demonstrate the huge potential for systemic risk management through rearranging
exposure networks, in contrast to increasing capital requirements that were
shown to have only marginal effects on systemic risk [poledna2017]. Ways to
actually incentivize a self-organized formation toward optimal network
configurations were introduced in [thurner2013] and [poledna2016]. For
regulatory policies concerning financial market stability the knowledge of
minimal systemic risk for a given economic environment can serve as a benchmark
for monitoring actual systemic risk in markets.Comment: 25 page
- âŠ