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Systemic Risk and the European Banking Sector

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Author Info

  • Nicola Borri

    ()
    (LUISS Guido Carli University, Department of Economics and Finance and CASMEF)

  • Marianna Caccavaio

    ()
    (LUISS Guido Carli University, Department of Economics and Finance and CASMEF)

  • Giorgio Di Giorgio

    ()
    (LUISS Guido Carli University, Department of Economics and Finance and CASMEF)

  • Alberto Maria Sorrentino

    ()
    (University of Rome Tor Vergata and CASMEF)

Abstract

Systemic risk is the risk of a collapse of the entire financial system, typically triggered by the default of one, or more, large and interconnected financial institutions. In this paper we estimate the systemic risk contribution of each financial institution in a large sample of European banks. We follow a recent methodology first proposed by Adrian and Brunnermeier (2011) based on the CoVaR and find that size is a predictor of a bank contribution to systemic risk, but it is not the only one. Leverage is important as well. Also, banks that have their headquarters in countries with a more concentrated banking system tend to contribute more to European wide systemic risk, even after controlling for their size. Therefore, any financial regulation designed only to curb banksÕ size would not completely eliminate systemic risk. On average, balance sheet variables are very weak predictors of banksÕ contribution to systemic risk, if compared to market based variables. Accounting rules provide enough degrees of freedom to make balance sheet less informative than market prices. As a result, measures of risk based on higher frequency market prices are more likely to anticipate systemic risk.

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Bibliographic Info

Paper provided by Dipartimento di Economia e Finanza, LUISS Guido Carli in its series Working Papers CASMEF with number 1211.

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Date of creation: 2012
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Handle: RePEc:lui:casmef:1211

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Keywords: Systemic Risk; SIFIs; European Banking System; CoVaR.;

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  1. Sheri Markose & Simone Giansante & Mateusz Gatkowski & Ali Rais Shaghaghi, 2010. "Too Interconnected To Fail: Financial Contagion and Systemic Risk in Network Model of CDS and Other Credit Enhancement Obligations of US Banks," Economics Discussion Papers 683, University of Essex, Department of Economics.
  2. Stefano Giglio, 2011. "Credit default swap spreads and systemic financial risk," Proceedings 1122, Federal Reserve Bank of Chicago.
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