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Ranking Systemically Important Financial Institutions

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Author Info

  • Mardi Dungey

    (School of Economics and Finance, University of Tasmania; CFAP University of Cambridge, CAMA ANU)

  • Matteo Luciani

    (ECARES, Solvay Brussels School of Economics and Management, Universit� Libre de Bruxelles; F.R.S.-FNRS)

  • David Veredas

    (ECARES, Solvay Brussels School of Economics and Management, and Duisenberg school of finance)

Abstract

We propose a simple network–based methodology for ranking systemically important financial institutions. We view the risks of firms –including both the financial sector and the real economy– as a network with nodes representing the volatility shocks. The metric for the connections of the nodes is the correlation between these shocks. Daily dynamic centrality measures allow us to rank firms in terms of risk connectedness and firm characteristics. We present a general systemic risk index for the financial sector. Results from applying this approach to all firms in the S&P500 for 2003–2011 are twofold. First, Bank of America, JP Morgan and Wells Fargo are consistently in the top 10 throughout the sample. Citigroup and Lehman Brothers also were consistently in the top 10 up to late 2008. At the end of the sample, insurance firms emerge as systemic. Second, the systemic risk in the financial sector built–up from early 2005, peaked in September 2008, and greatly reduced after the introduction of TARP and the rescue of AIG. Anxiety about European debt markets saw the systemic risk begin to rise again from April 2010. We further decompose these results to find that the systemic risk of insurance and deposit–taking institutions differs importantly, the latter experienced a decline from late 2007, inline with the burst of the housing price bubble, while the former continued to climb up to the rescue of AIG.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 12-115/IV/DSF44.

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Date of creation: 26 Oct 2012
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Handle: RePEc:dgr:uvatin:20120115

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Web page: http://www.tinbergen.nl

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Keywords: Systemic risk; ranking; financial institutions; Lehman;

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References

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  1. Mardi Dungey & Matteo Luciani & David Veredas, 2012. "Ranking Systemically Important Financial Institutions," Tinbergen Institute Discussion Papers 12-115/IV/DSF44, Tinbergen Institute.
  2. Viral Acharya & Robert Engle & Matthew Richardson, 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks," American Economic Review, American Economic Association, vol. 102(3), pages 59-64, May.
  3. Nijskens, Rob & Wagner, Wolf, 2011. "Credit risk transfer activities and systemic risk: How banks became less risky individually but posed greater risks to the financial system at the same time," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1391-1398, June.
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  7. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-62, November.
  8. de Bandt, Olivier & Hartmann, Philipp, 2000. "Systemic Risk: A Survey," CEPR Discussion Papers 2634, C.E.P.R. Discussion Papers.
  9. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Ebens, Heiko, 2001. "The distribution of realized stock return volatility," Journal of Financial Economics, Elsevier, vol. 61(1), pages 43-76, July.
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  11. Dimitrios Bisias & Mark Flood & Andrew W. Lo & Stavros Valavanis, 2012. "A Survey of Systemic Risk Analytics," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 255-296, October.
  12. LAHAYE, Jérôme & LAURENT, Sébastien & NEELY, Christopher J., . "Jumps, cojumps and macro announcements," CORE Discussion Papers RP -2413, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  13. Thomas Flavin & Gerald P. Dwyer & Mardi Dungey, 2011. "Systematic and Liquidity Risk in Subprime-Mortgage Backed SecuritiesM," Economics, Finance and Accounting Department Working Paper Series n219-11, Department of Economics, Finance and Accounting, National University of Ireland - Maynooth.
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  15. Matteo Luciani & David Veredas, 2012. "A model for vast panels of volatilities," Banco de Espa�a Working Papers 1230, Banco de Espa�a.
  16. Burls, Sarah, 2009. "Bank of England Systemic Risk Survey," Bank of England Quarterly Bulletin, Bank of England, vol. 49(3), pages 226-231.
  17. Kyle Moore & Chen Zhou, 2012. "Identifying systemically important financial institutions: size and other determinants," DNB Working Papers 347, Netherlands Central Bank, Research Department.
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  19. Andersen, Torben G. & Bollerslev, Tim & Diebold, Francis X. & Vega, Clara, 2007. "Real-time price discovery in global stock, bond and foreign exchange markets," Journal of International Economics, Elsevier, vol. 73(2), pages 251-277, November.
  20. Torben G. Andersen & Tim Bollerslev & Francis X. Diebold & Paul Labys, 2001. "Modeling and Forecasting Realized Volatility," Center for Financial Institutions Working Papers 01-01, Wharton School Center for Financial Institutions, University of Pennsylvania.
  21. Eugenio Cerutti & Stijn Claessens & Patrick McGuire, 2012. "Systemic risk in global banking: what can available data tell us and what more data are needed?," BIS Working Papers 376, Bank for International Settlements.
  22. Nikola Tarashev & Mathias Drehmann, 2011. "Measuring the systemic importance of interconnected banks," BIS Working Papers 342, Bank for International Settlements.
  23. Nobuhiro Kiyotaki & John Moore, 2002. "Balance-Sheet Contagion," American Economic Review, American Economic Association, vol. 92(2), pages 46-50, May.
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Citations

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Cited by:
  1. Dungey, Mardi & Luciani, Matteo & Veredas, David, 2012. "Ranking systemically important financial institutions," Working Papers 15473, University of Tasmania, School of Economics and Finance, revised 21 Nov 2012.
  2. Aldasoro, Iñaki & Angeloni, Ignazio, 2013. "Input-Output-based Measures of Systemic Importance," MPRA Paper 49557, University Library of Munich, Germany.
  3. Matteo Barigozzi & Christian T. Brownlees, 2013. "Nets: Network estimation for time series," Economics Working Papers 1391, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Alexeev, Vitali & Dungey, Mardi, 2013. "Equity portfolio diversification with high frequency data," Working Papers 2013-18, University of Tasmania, School of Economics and Finance, revised 01 Nov 2013.
  5. Masciantonio, Sergio, 2013. "Identifying, ranking and tracking systemically important financial institutions (SIFIs), from a global, EU and Eurozone perspective," MPRA Paper 46788, University Library of Munich, Germany.

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