scholarly journals Measuring the probability of a financial crisis

2019 ◽  
Vol 116 (37) ◽  
pp. 18341-18346 ◽  
Author(s):  
Robert F. Engle ◽  
Tianyue Ruan
Keyword(s):  
Financial Crisis ◽  
Systemic Risk ◽  
Financial Crises ◽  
Risk Measures ◽  
Financial Sector ◽  
Developed Countries ◽  
Financial Firms ◽  
Capacity Measure ◽  
Natural Response ◽  
Tail Events

When financial firms are undercapitalized, they are vulnerable to external shocks. The natural response to such vulnerability is to reduce leverage, and this can endogenously start a financial crisis. Excessive credit growth, the main cause of financial crises, is reflected in the undercapitalization of the financial sector. Market-based measures of systemic risk such as SRISK, which stands for systemic risk, enable monitoring how such weakness emerges and progresses in real time. In this paper, we develop quantitative estimates of the level of systemic risk in the financial sector that precipitates a financial crisis. Common approaches to reduce leverage correspond to specific scaling of systemic risk measures. In an econometric framework that recognizes financial crises represent left tail events for the economy, we estimate the relationship between SRISK and the financial crisis severity for 23 developed countries. We develop a probability of crisis measure and an SRISK capacity measure based on our estimates. Our analysis highlights the important global externality whereby the risk of a crisis in one country is strongly influenced by the undercapitalization of the rest of the world.

scholarly journals Measuring the systemic risk in the South African banking sector

2017 ◽  
Vol 20 (1) ◽  
Author(s):  
Gregory M. Foggitt ◽  
Andre Heymans ◽  
Gary W. Van Vuuren ◽  
Anmar Pretorius
Keyword(s):  
Financial Crisis ◽  
South African ◽  
Systemic Risk ◽  
Banking Sector ◽  
Risk Index ◽  
Financial Sector ◽  
Ethical Behaviour ◽  
The South ◽  
Case Scenario ◽  
Worst Case

Background: In the aftermath of the sub-prime crisis, systemic risk has become a greater priority for regulators, with the National Treasury (2011) stating that regulators should proactively monitor changes in systemic risk.Aim: The aim is to quantify systemic risk as the capital shortfall an institution is likely to experience, conditional to the entire financial sector being undercapitalised.Setting: We measure the systemic risk index (SRISK) of the South African (SA) banking sector between 2001 and 2013.Methods: Systemic risk is measured with the SRISK.Results: Although the results indicated only moderate systemic risk in the SA financial sector over this period, there were significant spikes in the levels of systemic risk during periods of financial turmoil in other countries. Especially the stock market crash in 2002 and the subprime crisis in 2008. Based on our results, the largest contributor to systemic risk during quiet periods was Investec, the bank in our sample which had the lowest market capitalisation. However, during periods of financial turmoil, the contributions of other larger banks increased markedly.Conclusion: The implication of these spikes is that systemic risk levels may also be highly dependent on external economic factors, in addition to internal banking characteristics. The results indicate that the economic fundamentals of SA itself seem to have little effect on the amount of systemic risk present in the financial sector. A more significant relationship seems to exist with the stability of the financial sectors in foreign countries. The implication therefore is that complying with individual banking regulations, such as Basel, and corporate governance regulations promoting ethical behaviour, such as King III, may not be adequate. It is therefore proposed that banks should always have sufficient capital reserves in order to mitigate the effects of a financial crisis in a foreign country. The use of worst-case scenario analyses (such as those in this study) could aid in determining exactly how much capital banks could need in order to be considered sufficiently capitalised during a financial crisis, and therefore safe from systemic risk.

scholarly journals Economic crises and suicides between 1970 and 2011: time trend study in 21 developed countries

2019 ◽  
Vol 73 (4) ◽  
pp. 311-316 ◽  
Author(s):  
Sanna Huikari ◽  
Jouko Miettunen ◽  
Marko Korhonen
Keyword(s):  
Financial Crisis ◽  
Stock Market ◽  
Financial Crises ◽  
Negative Binomial ◽  
Global Financial Crisis ◽  
Developed Countries ◽  
Suicide Mortality ◽  
Suicide Rates ◽  
Market Crashes ◽  
Economic Recessions

BackgroundExisting research on the relationship between economic recessions and suicides has almost completely concentrated on the most recent global financial crisis (2008). We provide the most comprehensive explanation to date of how different types of economic/financial crises since 1970 have affected suicides in developed countries.MethodsNegative binomial regressions were used to estimate what the suicide rates would have been during and 1 year after each crisis began in 21 Organisation for Economic Co-operation and Development countries from 1970 to 2011 if the suicide rates had followed the pre-crisis trends.ResultsWe found that every economic/financial crisis since 1970, except the European Exchange Rate Mechanism crisis in 1992, led to excess suicides in developed countries. Among males, the excess suicide rate (per 100 000 persons) varied from 1.1 (95% CI 0.7 to 1.5) to 9.5 (7.6 to 11.2) and, among females, from 0 to 2.4 (1.9 to 2.9). For both sexes, suicides increased mostly due to stock market crashes and banking crises. In terms of actual numbers, the post-1969 economic/financial crises caused >60 000 excess suicides in the 21 developed countries. The Asian financial crisis in 1997 was the most damaging crisis when assessed based on excess suicides.ConclusionsEvidence indicates that, when considered in terms of effects on suicide mortality, the most recent global financial crisis is not particularly severe compared with previous global economic/financial crises. The distinct types of crises (ie, banking, currency and inflation crises, and stock market crashes) have different effects on suicide.

scholarly journals The Growing Importance of the Financial Sector in the Founding Countries of the European Union

2021 ◽  
Vol 2 (26) ◽  
pp. 37-49
Author(s):  
Tomasz Florczak
Keyword(s):  
European Union ◽  
Economic Development ◽  
United Kingdom ◽  
Financial Crisis ◽  
21St Century ◽  
Banking Sector ◽  
Financial Sector ◽  
Developed Countries ◽  
The Other ◽  
The European Union

The economies of the 21st century countries operate on the principle of connected vessels. A significant element of changes in economies is the growth of the financial sector. The process of financial sector growth is often referred as financialization. The significant impact of this sector on economic development was shown during the financial crisis of 2008. Financialization is more visible in highly developed countries. Undoubtedly the founding countries of the European Union belong to highly developed countries. It is possible that the financialization is higher in bigger countries like France, Germany, Italy or United Kingdom, which can also have bigger financial sectors. From the other side there is also country, which economy is based on banks. The aim of the article is to indicate the growth of the financial sector in the founding countries of the European Union. To determine the growth of the financial sector, the author used the indicators appearing in the literature of subject. There are indicators relating to functioning of the economy and banking sector. The second method helps to determine in which country financialization is higher. To made the research there was used zero unitarization method. The results of the study allows to determine in which of the subjects the financial sector is at a higher level of development. It is possible, that during researched period there were changes in financializiation of researched countries.

scholarly journals SYSTEMIC RISK IN TAIWAN STOCK MARKET

2012 ◽  
Vol 13 (5) ◽  
pp. 895-914 ◽  
Author(s):  
Her-Jiun Sheu ◽  
Chien-Ling Cheng
Keyword(s):  
Financial Crisis ◽  
Stock Market ◽  
Systemic Risk ◽  
Financial Crises ◽  
Idiosyncratic Risk ◽  
Risk Indicators ◽  
2008 Financial Crisis ◽  
Independent Variables ◽  
The Impact ◽  
Dot Com

Recent financial crises resulted from systemic risk caused by idiosyncratic distress. In this research, taking Taiwan stock market as an example and collecting data from 2000 to 2010 which contained the 2001 dot-com bubble and the 2007–2009 financial crisis, we adopt the CoVaR model to empirically explore the impact of sector-specific idiosyncratic risk on the systemic risk of the system and attempt to investigate the links between financial crises, systemic risk and the idiosyncratic risk of a sector-specific anomaly. The result showed sector-specific marginal CoVaR, i.e., ΔCoVaR, perfectly explained Taiwan stock market disturbance during the 2001 dot-com bubble and 2007–2008 financial crisis. Thus, by identifying the larger ΔCoVaR sectors, i.e. the systemic importance sectors, and by exploring the risk indicators, independent variables, of these systemic importance sectors, investors could practically employ the sector-specific ΔCoVaR measure to deepen the systemic risk scrutiny from a macro into a micro prudential perspective.

Industry and Financial Crises in Fragile and Zombie Firms: Does Leverage Matter?

2018 ◽  
Vol 3 (3) ◽  
pp. 51-58
Author(s):  
Santi Novita ◽  
Bambang Tjahjadi ◽  
Andry Irwanto
Keyword(s):  
Financial Crisis ◽  
Financial Crises ◽  
Jel Classification ◽  
Significant Implication ◽  
Financial Firms ◽  
Financial Soundness

Objective - This paper shows how leverage affects firm's fragility and financial soundness during financial and industry crises. Methodology/Technique - Long term inefficient and zombie firms are explored through the effects of leverage in additional tests. Findings - There are two main results obtained from the sample of Indonesian non-financial firms from 2007 to 2016. First, leverage has a statistically significant correlation with firm's fragility. Second, leverage has an effect on firm's financial soundness during industry crisis. Novelty - Unlike the previous paper, this paper demonstrates a significant implication on the need to differentiate fragile firms and firms that are persistently inefficient, such as zombie firms. Type of Paper: Empirical. Keywords: Fragility; Zombie; Financial Soundness; Leverage; Industry Crisis; Financial Crisis. JEL Classification: M20, M41.

Systemic Risk in Banking after the Great Financial Crisis

2019 ◽  
pp. 846-884
Author(s):  
Olivier De Bandt ◽  
Philipp Hartmann
Keyword(s):  
Financial Crisis ◽  
Conceptual Framework ◽  
Systemic Risk ◽  
Financial Crises ◽  
Empirical Literature ◽  
Aggregate Shocks ◽  
The Great Depression ◽  
Ex Post ◽  
Systemic Risks ◽  
Systemic Crisis

In this chapter we present a comprehensive review of systemic risk in banking, as the primary ingredient for understanding financial crises that have severe adverse effects on the macroeconomy (such as the Great Depression or the recent Great Financial Crisis). The first part of the chapter develops a conceptual framework that distinguishes three main forms of systemic risk: contagion, aggregate shocks, and the endogenous build-up and unraveling of widespread financial imbalances (such as credit booms leading to debt overhangs). Ex ante (preventive) policies, notably macroprudential regulation and supervision, and ex post (crisis management and resolution) policies to contain systemic risks and financial crises are also discussed. The second and third parts of the chapter review the existing theoretical and empirical literature about systemic risk, using the previously described conceptual framework and making reference to features of the systemic crisis that started in the summer of 2007.

scholarly journals Central Banks, Systemic Risk and Financial Sector Structural Reform

2018 ◽  
Author(s):  
Saule T. Omarova
Keyword(s):  
Systemic Risk ◽  
Financial Stability ◽  
Financial Sector ◽  
Central Banks ◽  
Structural Reform ◽  
Structural Reforms ◽  
Financial Industry ◽  
Financial Firms ◽  
Different Types ◽  
Fundamental Pattern

This chapter contribution to an edited volume examines financial sector structural reform as a critical, though largely under-appreciated to date, dimension of central banks’ post-crisis systemic risk prevention agenda. By limiting the range of permissible transactions or organizational affiliations among different types of financial firms, structural reforms alter the fundamental pattern of interconnectedness in the financial system. In that sense, the chapter argues, reforming the institutional structure of the financial industry operates as a deeper form of the currently evolving macroprudential regulation. The chapter identifies three principal models that form a continuum of potential financial sector structural reform choices and applies this conceptual framework to analysis of post-crisis structural reforms in the U.K., EU, and U.S. It further examines how deeply issues of financial industry structure are embedded in central banks’ regulatory and policy agenda and, in light of this connection, discusses potential implications of current structural reforms for central banks’ post-crisis financial stability mandate.

Systemic Risk 10 Years Later

2018 ◽  
Vol 10 (1) ◽  
pp. 125-152 ◽  
Author(s):  
Robert Engle
Keyword(s):  
Financial Crisis ◽  
Financial Institutions ◽  
Systemic Risk ◽  
High Probability ◽  
Financial Sector ◽  
New Research

Ten years ago, the financial crisis spurred research focused on systemic risk. This article examines the history and application of the SRISK measure, which was developed at that time and is now widely used in monitoring systemic risk around the globe. The concept is explained and a variety of ways to measure SRISK are developed. In this article, new results are presented on the uncertainty associated with the SRISK measure and on how it compares with other related measures from both academics and regulators. By focusing on the mechanism by which undercapitalization of the financial sector initiates a financial crisis, new research examines how the probability of a financial crisis is affected by the level of SRISK and, consequently, how much SRISK a country can stand without having a high probability of crisis. The model used to evaluate this probability recognizes the externalities between financial institutions that make an undercapitalized firm or country more fragile if other firms and countries are also undercapitalized.

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