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Towards a Framework for Quantifying Systemic Stability

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Author Info
Piergiorgio Alessandri (Bank of England)
Prasanna Gai (Australian National University)
Sujit Kapadia (Bank of England)
Nada Mora (Bank of England)
Claus Puhr (Oesterreichische Nationalbank)
Abstract

This paper describes a prototype quantitative framework for gauging systemic risk which explicitly characterizes banks’ balance sheets and allows for macro credit risk, interest income risk, market risk, network interactions, and asset-side feedback effects. In presenting our results, we focus on projections for systemwide banking assets in the United Kingdom, considering both unconditional distributions and stress scenarios.We show how a combination of extreme credit and trading losses can precipitate fundamental defaults and trigger contagious default associated with network effects and fire sales of distressed assets. Despite the joint normality of all risk factors, the model generates a bimodal asset distribution.

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Publisher Info
Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 5 (2009)
Issue (Month): 3 (September)
Pages: 47-81
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Handle: RePEc:ijc:ijcjou:y:2009:q:3:a:2

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Find related papers by JEL classification:
G01 - Financial Economics - - General - - - Financial Crises
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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  2. Filippo di Mauro & L. Vanessa Smith & Stephane Dees & M. Hashem Pesaran, 2007. "Exploring the international linkages of the euro area: a global VAR analysis," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(1), pages 1-38. [Downloadable!]
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  7. Isabel Schnabel & Hyun Song Shin, 2004. "Liquidity and Contagion: The Crisis of 1763," Journal of the European Economic Association, MIT Press, vol. 2(6), pages 929-968, December. [Downloadable!] (restricted)
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