Systemic Risk Allocation for Systems with a Small Number of Banks

When setting banks regulatory capital requirement based on their contribution to the overall risk of the banking system we need to consider that the risk of the banking system as well as each banks risk contribution changes once bank equity capital gets redistributed. Therefore the present paper provides a theoretical framework to manage the systemic risk of the banking system in Nigeria based on macroprudential capital requirements, which requires banks to hold capital that is proportional to their contribution to systemic risk. Using a sample of 10 Nigerian banks, we reallocate capital in the system based on two scenarios; firstly in the situation where the system shocks do not exist in the system, we find that almost all banks appear to hold more capital; secondly, we also consider the situation where the system shocks exist in the system; we find that almost all banks tend to hold little capital on four risk allocation mechanisms. We further find that despite the heterogeneity in macroprudential capital requirements, all risk allocation mechanisms bring a substantial decrease in the systemic risk. The risk allocation mechanism based on ΔCoVaR decreases the average default probability the most. Our results suggest that financial stability can be substantially improved by implementing macroprudential regulations for the banking system.

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Systemic risk allocation using the asymptotic marginal expected shortfall

Journal of Banking & Finance ◽

10.1016/j.jbankfin.2021.106099 ◽

2021 ◽

pp. 106099

Author(s):

Xiao Qin ◽

Chen Zhou

Keyword(s):

Systemic Risk ◽

Expected Shortfall ◽

Risk Allocation ◽

Marginal Expected Shortfall

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ALLOCATING SYSTEMIC RISK IN A REGULATORY PERSPECTIVE

International Journal of Theoretical and Applied Finance ◽

10.1142/s0219024913500416 ◽

2013 ◽

Vol 16 (07) ◽

pp. 1350041 ◽

Cited By ~ 12

Author(s):

C. GOURIEROUX ◽

A. MONFORT

Keyword(s):

Systemic Risk ◽

Axiomatic Approach ◽

Risk Allocation ◽

Cross Effect ◽

Allocation System ◽

Coherent Risk ◽

Aggregate Risk ◽

Regulatory Perspective

The paper proposes an axiomatic approach for allocating aggregate risk among individual entities. It is shown that a risk allocation system should obey two axioms. The allocations satisfying these axioms are called coherent risk contributions and are characterized. In the paper, the contribution of each entity is decomposed into a systemic part, an unsystemic part and, possibly, a cross effect. Consequences in terms of regulation are discussed.

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Multivariate Shortfall Risk Allocation and Systemic Risk

SIAM Journal on Financial Mathematics ◽

10.1137/16m1087357 ◽

2018 ◽

Vol 9 (1) ◽

pp. 90-126 ◽

Cited By ~ 18

Author(s):

Yannick Armenti ◽

Stéphane Crépey ◽

Samuel Drapeau ◽

Antonis Papapantoleon

Keyword(s):

Systemic Risk ◽

Risk Allocation ◽

Shortfall Risk

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Macroprudential Policy Instruments of Central Banks

Voprosy Ekonomiki ◽

10.32609/0042-8736-2012-8-32-47 ◽

2012 ◽

pp. 32-47

Author(s):

S. Andryushin ◽

V. Kuznetsova

Keyword(s):

Systemic Risk ◽

Financial Stability ◽

Financial System ◽

Policy Instruments ◽

Central Banks ◽

Macroprudential Policy ◽

Policy Studies ◽

The Future ◽

Financial Cycles

The paper analyzes central banks macroprudencial policy and its instruments. The issues of their classification, option, design and adjustment are connected with financial stability of overall financial system and its specific institutions. The macroprudencial instruments effectiveness is evaluated from the two points: how they mitigate temporal and intersectoral systemic risk development (market, credit, and operational). The future macroprudentional policy studies directions are noted to identify the instruments, which can be used to limit the financial systemdevelopment procyclicality, mitigate the credit and financial cycles volatility.

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Risk Factors of Collateralized Loan Obligations and Corporate Bonds

Zeitschrift für Bankrecht und Bankwirtschaft ◽

10.15375/zbb-2020-0604 ◽

2020 ◽

Vol 32 (6) ◽

pp. 347-355

Author(s):

Mark Wahrenburg ◽

Andreas Barth ◽

Mohammad Izadi ◽

Anas Rahhal

Keyword(s):

Risk Factors ◽

Risk Factor ◽

Asset Pricing ◽

Systemic Risk ◽

Corporate Bonds ◽

Risk Exposure ◽

Expected Returns ◽

Yield Spreads ◽

Pricing Factors ◽

Return Difference

AbstractStructured products like collateralized loan obligations (CLOs) tend to offer significantly higher yield spreads than corporate bonds (CBs) with the same rating. At the same time, empirical evidence does not indicate that this higher yield is reduced by higher default losses of CLOs. The evidence thus suggests that CLOs offer higher expected returns compared to CB with similar credit risk. This study aims to analyze whether this return difference is captured by asset pricing factors. We show that market risk is the predominant risk factor for both CBs and CLOs. CLO investors, however, additionally demand a premium for their risk exposure towards systemic risk. This premium is inversely related to the rating class of the CLO.

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