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Exploring the Systemic Risk of Domestic Banks with ΔCoVaR and Elastic-Net

Author

Listed:
  • Michele Leonardo Bianchi

    (Directorate General for Economics, Statistics and Research, Bank of Italy)

  • Alberto Maria Sorrentino

    (Directorate General for Financial Supervision and Regulation, Bank of Italy)

Abstract

We analyze the systemic risk of Italian banks with the ΔCoVaR from a bivariate normal GARCH model. The results show that it is a good measure of systemic risk and is applicable to the ranking of Italian other systemically important institutions. Using an elastic-net approach, we identify the balance sheet and market variables that explain the ΔCoVaR of Italian banks. The analysis confirms that these variables are key determinants of systemic importance and highlights how higher capitalization is beneficial to tackling systemic risk. And, we detect a connection between ΔCoVaR and some variables for trading and investment banking.

Suggested Citation

  • Michele Leonardo Bianchi & Alberto Maria Sorrentino, 2022. "Exploring the Systemic Risk of Domestic Banks with ΔCoVaR and Elastic-Net," Journal of Financial Services Research, Springer;Western Finance Association, vol. 62(1), pages 127-141, October.
    • Handle: RePEc:kap:jfsres:v:62:y:2022:i:1:d:10.1007_s10693-021-00366-9
    DOI: 10.1007/s10693-021-00366-9
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial crisis; Capital regulation; Banking supervision; Internal risk models; Systemic risk; Value-at-risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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