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Systemic Risk in the Italian Banking Industry

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  • Nicola Borri
  • Marianna Caccavaio
  • Giorgio Di Giorgio
  • Alberto Maria Sorrentino

Abstract

type="main"> Systemic risk is the risk of a collapse of the entire financial system, typically triggered by the default of one, or more, interconnected financial institutions. In this paper, we estimate the systemic risk contribution of Italian-listed banks for the period 2000–2011. We follow a methodology first proposed by Adrian and Brunnermeier and measure banks' contribution to systemic risk by ΔCoVaR, which measures the contribution of bank i to the financial system VaR when bank i is in a state of distress. We define ‘the system’ as the set of Italian-listed banks in the sample. First, we find that the information contained in ΔCoVaR is different from that contained in the VaR. Therefore, regulators should take it into account in order to monitor the systemic risk posed by banks. Second, recent policy debate has focused on the danger posed by large banks and on the need to curb their size. We find that size is indeed the main predictor of a bank contribution to systemic risk. However, in the post-Lehman period, leverage is also an important predictor of systemic risk. Consequently, any financial regulation designed only to curb banks' size could not completely eliminate systemic risk because it is exactly in crisis times that leverage becomes relevant. Hence, we conclude that ΔCoVaR is a very useful policy tool for regulators that can estimate which factors are more relevant in terms of contribution to systemic risk.

Suggested Citation

  • Nicola Borri & Marianna Caccavaio & Giorgio Di Giorgio & Alberto Maria Sorrentino, 2014. "Systemic Risk in the Italian Banking Industry," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 43(1), pages 21-38, February.
    • Handle: RePEc:bla:ecnote:v:43:y:2014:i:1:p:21-38
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    Cited by:

    1. Borri, Nicola & Giorgio, Giorgio di, 2022. "Systemic risk and the COVID challenge in the european banking sector," Journal of Banking & Finance, Elsevier, vol. 140(C).
    2. Efthymios Pavlidis & Ivan Paya & Alexandros Skouralis, 2021. "House prices, (un)affordability and systemic risk," New Zealand Economic Papers, Taylor & Francis Journals, vol. 55(1), pages 105-123, January.
    3. Marwa Elnahass & Mohamed Marie & Mohammed Elgammal, 2022. "Terrorist attacks and bank financial stability: evidence from MENA economies," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 383-427, July.
    4. Daniel Traian PELE & Alexandra Ioana CONDA & Raul Cristian BAG & Miruna MAZURENCU-MARINESCU-PELE & Vasile Alecsandru STRAT, 2023. "Financial Risk Meter for The Romanian Stock Market," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-24, March.
    5. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    6. T.G. Saji, 2018. "Predicting Market Betas," Paradigm, , vol. 22(2), pages 160-174, December.
    7. de Mendonça, Helder Ferreira & Silva, Rafael Bernardo da, 2018. "Effect of banking and macroeconomic variables on systemic risk: An application of ΔCOVAR for an emerging economy," The North American Journal of Economics and Finance, Elsevier, vol. 43(C), pages 141-157.
    8. Wang, Xiaoting & Hou, Siyuan & Shen, Jie, 2021. "Default clustering of the nonfinancial sector and systemic risk: Evidence from China," Economic Modelling, Elsevier, vol. 96(C), pages 196-208.
    9. Kurter, Zeynep O., 2022. "How macroeconomic conditions affect systemic risk in the short and long-run?," The Warwick Economics Research Paper Series (TWERPS) 1407, University of Warwick, Department of Economics.
    10. Matteo Foglia & Eliana Angelini, 2019. "An explorative analysis of Italy banking financial stability," Economics Bulletin, AccessEcon, vol. 39(2), pages 1294-1308.
    11. Laura Garcia-Jorcano & Lidia Sanchis-Marco, 2023. "Measuring Systemic Risk Using Multivariate Quantile-Located ES Models," Journal of Financial Econometrics, Oxford University Press, vol. 21(1), pages 1-72.
    12. Mikhail Stolbov, 2017. "Assessing systemic risk and its determinants for advanced and major emerging economies: the case of ΔCoVaR," International Economics and Economic Policy, Springer, vol. 14(1), pages 119-152, January.
    13. Michele Leonardo Bianchi & Alberto Maria Sorrentino, 2020. "Measuring CoVaR: An Empirical Comparison," Computational Economics, Springer;Society for Computational Economics, vol. 55(2), pages 511-528, February.

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