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.

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.

The more connected, the better? Impact of connectedness on volatility and price discovery in the Korean financial sector

2018 ◽  
Vol 44 (1) ◽  
pp. 46-73 ◽  
Author(s):  
DeokJong Jeong ◽  
Sunyoung Park
Keyword(s):  
Financial Crisis ◽  
Stock Market ◽  
Financial Institutions ◽  
Market Microstructure ◽  
Stock Price ◽  
Price Discovery ◽  
Global Financial Crisis ◽  
Financial Sector ◽  
Asian Crisis ◽  
Content Type

Purpose The purpose of this paper is to empirically analyze the effect of the increasing connectedness among financial institutions in the Korean financial market, as it affects the market microstructure in the stock market. Thus this work, first, analyzes the trend and characteristics of connectedness in the Korean financial sector. This work then demonstrates the impacts of connectedness on volatility and price discovery in the stock market. Design/methodology/approach The entire Korean financial sector is analyzed from January 1990 to July 2015, including the periods of the 1997 Asian crisis and the 2007/2008 global financial crisis. This paper quantifies the connectedness between financial institutions using network methodology. Densely connectedness specifically refers to the cases in which a node experiences strong-lagged return spillover from and/or to itself. Findings Connectedness is established as an important determinant of stock price discovery. This paper illustrates that connectedness increases on significant economic events such as the 1997 Asian crisis and the 2007/2008 global financial crisis. Furthermore, this paper demonstrates that the more densely connected a particular financial institution, the more volatile the stock price and the less accurate the stock price quality. Research limitations/implications Understanding the financial system from a network perspective has been on the rise after the 2007/2008 global financial crisis. This work helps regulators and policy makers understand the full implications of introducing new policies that can more closely connect financial institutions. Originality/value This paper precisely captures financial institutions’ connectedness by including all types of financial institutions at the micro level. Additionally, this paper links connectedness to market microstructure in the stock market.

scholarly journals The Leaders, the Laggers, and the “Vulnerables”

Risks ◽  
2020 ◽  
Vol 8 (1) ◽  
pp. 26
Author(s):  
Veni Arakelian ◽  
Shatha Qamhieh Hashem
Keyword(s):  
Financial Crisis ◽  
Bayesian Network ◽  
Financial Institutions ◽  
Systemic Risk ◽  
Expected Shortfall ◽  
Risk Indicators ◽  
Network Structures ◽  
Lag Effect ◽  
Marginal Expected Shortfall ◽  
The Individual

We examine the lead-lag effect between the large and the small capitalization financial institutions by constructing two global weekly rebalanced indices. We focus on the 10% of stocks that “survived” all the rebalancings by remaining constituents of the indices. We sort them according to their systemic importance using the marginal expected shortfall (MES), which measures the individual institutions’ vulnerability over the market, the network based MES, which captures the vulnerability of the risks generated by institutions’ interrelations, and the Bayesian network based MES, which takes into account different network structures among institutions’ interrelations. We also check if the lead-lag effect holds in terms of systemic risk implying systemic risk transmission from the large to the small capitalization, concluding a mixed behavior compared to the index returns. Additionally, we find that all the systemic risk indicators increase their magnitude during the financial crisis.

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 Exploring Systemic Risk of Chinese SIFIs using a Simplified SRISK Model

2018 ◽  
Vol 15 (3) ◽  
pp. 469
Author(s):  
Muhammad Jamal Haider ◽  
Adrian Hemmes ◽  
Gao Changchun ◽  
Tayyaba Akram
Keyword(s):  
Financial Crisis ◽  
Financial Institutions ◽  
Systemic Risk ◽  
Risk Index ◽  
Historical Context ◽  
Risk Exposure ◽  
2008 Financial Crisis ◽  
Increasing Trend ◽  
Economic Slowdown ◽  
The 2008 Financial Crisis

The exposure of banks to systemic risk has been rising in an ever more financialized and interconnected economy. In China, economic slowdown and more non-performing loans mean that the financial system has operate in an increasingly stressed environment, strengthening the vulnerability of future systemic shortfall. In this study, systemic risk in Chinese systematically important financial institutions (SIFIs) is analyzed using a simplified SRISK model. The results are set into historical context, its characteristics are illustrated, and compared to an existing risk index. With that the study contributes to the existing literature by exploring application the SRISK model from a regulatory framework and illustrating some of its implications on Chinese SIFIs. The key findings include (1) an increasing trend of systemic risk exposure and (2) evidence for a divergence between volatility and systemic risk since the 2008 financial crisis.

scholarly journals The safety network system and prospects for the appearance of a financial crisis in Bosnia and Herzegovina

2008 ◽  
Vol 53 (178-179) ◽  
pp. 198-229
Author(s):  
Novo Plakalovic
Keyword(s):  
Financial Crisis ◽  
Bosnia And Herzegovina ◽  
Financial Institutions ◽  
Banking Sector ◽  
Financial Sector ◽  
Bank Capital ◽  
Stress Tests ◽  
Foreign Countries ◽  
Potential Risks ◽  
High Level

The article is on the system of the safety network of the financial sector in Bosnia and Herzegovina (BH) and potential causes of possible financial instability. The network of protection of financial institutions in BH is to a certain extent incomplete but a high level of regulatory and supervisory activities has been present so far, which effects the expressed stability of financial institutions. Potential risks and the vulnerability of the financial system arise from a range of features which are characteristic of the local financial institutions, their activities, the condition of the BH economy, and macroeconomic stability and flows of goods and capital between the country and foreign countries. The sector of financial institutions has been privatized and it is in foreign ownership. Foreign exposure of domestic economy and financial markets is limited to only a small number of countries (Austria, Germany). There are pressures in respect of the increased rates of return on bank capital and there is a very high dynamic of credit growth. Possible unfavourable scenarios could bring about problems in the banking sector, which is shown by stress tests. The deterioration of the macroeconomic imbalance could also be a significant cause of serious problems in the local financial sector. There are no certain indicators that this could happen in the near future and influence the appearance of a financial crisis; however, such a situation cannot be ruled out.

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