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Systemic Risk Score: A Suggestion

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  • Christophe Hurlin

    ()
    (LEO - Laboratoire d'économie d'Orleans - CNRS : UMR6221 - Université d'Orléans)

  • Christophe Pérignon

    ()
    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - GROUPE HEC - CNRS : UMR2959)

Abstract

We identify a potential bias in the methodology disclosed in July 2013 by the Basel Committee on Banking Supervision (BCBS) for identifying systemically important financial banks. Contrary to the original objective, the relative importance of the five categories of risk importance (size, cross-jurisdictional activity, interconnectedness, substitutability/financial institution infrastructure, and complexity) may not be equal and the resulting systemic risk scores are mechanically dominated by the most volatile categories. In practice, this bias proved to be serious enough that the substitutability category had to be capped by the BCBS. We show that the bias can be removed by simply standardizing each input prior to computing the systemic risk scores.

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Bibliographic Info

Paper provided by HAL in its series Working Papers with number halshs-00867063.

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Date of creation: 27 Sep 2013
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Handle: RePEc:hal:wpaper:halshs-00867063

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Keywords: Systemic risk ; score ; G-SIFIs;

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Cited by:
  1. Michal Skorepa & Jakub Seidler, 2014. "Capital Buffers Based on Banks' Domestic Systemic Importance: Selected Issues," Research and Policy Notes 2014/01, Czech National Bank, Research Department.

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