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SAFE: An early warning system for systemic banking risk

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  • Mikhail V. Oet
  • Ryan Eiben
  • Timothy Bianco
  • Dieter Gramlich
  • Stephen J. Ong
  • Jing Wang

Abstract

This paper builds on existing microprudential and macroprudential early warning systems (EWSs) to develop a new, hybrid class of models for systemic risk, incorporating the structural characteristics of the fi nancial system and a feedback amplification mechanism. The models explain fi nancial stress using both public and proprietary supervisory data from systemically important institutions, regressing institutional imbalances using an optimal lag method. The Systemic Assessment of Financial Environment (SAFE) EWS monitors microprudential information from the largest bank holding companies to anticipate the buildup of macroeconomic stresses in the financial markets. To mitigate inherent uncertainty, SAFE develops a set of medium-term forecasting specifi cations that gives policymakers enough time to take ex-ante policy action and a set of short-term forecasting specifications for verification and adjustment of supervisory actions. This paper highlights the application of these models to stress testing, scenario analysis, and policy.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1129.

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Date of creation: 2011
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Handle: RePEc:fip:fedcwp:1129

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Keywords: Systemic risk ; Liquidity (Economics);

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  1. Mikhail V. Oet & Ryan Eiben & Timothy Bianco & Dieter Gramlich & Stephen J. Ong, 2011. "The financial stress index: identification of systemic risk conditions," Working Paper 1130, Federal Reserve Bank of Cleveland.
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