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Risk Assessment for Banking Systems

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Author Info
Martin Summer () (Oesterreichische Nationalbank, Economic Studies Division)
Helmut Elsinger () (University of Vienna, Department of Business Studies)
Alfred Lehar () (University of British Columbia, Faculty of Commerce)

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Abstract

In this paper we suggest a new approach to risk assessment for banks. Rather than looking at them individually we try to undertake an analysis at the level of the banking system. Such a perspective is necessary because the complicated network of mutual credit obligations can make the actual risk exposure of banks invisible at the level of individual institutions. We apply our framework to a cross section of individual bank data as they are usually collected at the central bank. Using standard risk management techniques in combination with a network model of interbank exposures we analyze the consequences of macroeconomic shocks for bank insolvency risk. In particular we consider interest rate shocks, exchange rate and stock market movements as well as shocks related to the business cycle. The feedback between individual banks and potential domino effects from bank defaults are taken explicitly into account. The model determines endogenously probabilities of bank insolvencies, recovery rates and a decomposition of insolvency cases into defaults that directly result from movements in risk factors and defaults that arise indirectly as a consequence of contagion.

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Publisher Info
Paper provided by Oesterreichische Nationalbank (Austrian Central Bank) in its series Working Papers with number 79.

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Length: 49 pages
Date of creation: 28 Oct 2002
Date of revision:
Handle: RePEc:onb:oenbwp:79

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Related research
Keywords: Systemic Risk Interbank Market Financial Stability Risk Management

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Find related papers by JEL classification:
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages
C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Statistical Simulation Methods
C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Microeconomic Data
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January. [Downloadable!] (restricted)
  2. James, Christopher, 1991. " The Losses Realized in Bank Failures," Journal of Finance, American Finance Association, vol. 46(4), pages 1223-42, September. [Downloadable!] (restricted)
  3. Franklin Allen & Douglas Gale, 1998. "Financial Contagion Journal of Political Economy," Center for Financial Institutions Working Papers 98-31, Wharton School Center for Financial Institutions, University of Pennsylvania. [Downloadable!]
  4. C. H. Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," BIS Working Papers 70, Bank for International Settlements. [Downloadable!]
  5. Martin Hellwig, 1995. "Systemic Aspects of Risk Management in Banking and Finance," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 131(IV), pages 723-737, December. [Downloadable!]
  6. Xavier Freixas & Bruno Parigi & Jean Charles Rochet, 1998. "Systemic Risk, Interbank Relations and Liquidity Provision by the Central Bank," Economics Working Papers 440, Department of Economics and Business, Universitat Pompeu Fabra, revised Sep 1999. [Downloadable!]
    Other versions:
  7. Martin Summer, 2003. "Banking Regulation and Systemic Risk," Open Economies Review, Springer, vol. 14(1), pages 43-70, January. [Downloadable!] (restricted)
    Other versions:
  8. Angelini, P. & Maresca, G. & Russo, D., 1996. "Systemic risk in the netting system," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 853-868, June. [Downloadable!] (restricted)
  9. Craig Furfine, 1999. "Interbank exposures: quantifying the risk of contagion," Proceedings, Federal Reserve Bank of Chicago, issue May, pages 313-328.
  10. Hellwig, Martin, 1998. "Systemische Risiken im Finanzsektor," Sonderforschungsbereich 504 Publications 98-30, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, . "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England. [Downloadable!]
  2. John Kambhu & Til Schuermann & Kevin J. Stiroh, 2007. "Hedge funds, financial intermediation, and systemic risk," Staff Reports 291, Federal Reserve Bank of New York. [Downloadable!]
    Other versions:
  3. Rodrigo Cifuentes, 2003. "Banking Concentration: Implications for Systemic Risk and Safety Net Design," Working Papers Central Bank of Chile 231, Central Bank of Chile. [Downloadable!]
  4. Philipp Hartmann & Stefan Straetmans & Casper G. De Vries, 2005. "Banking System Stability: A Cross-Atlantic Perspective," NBER Working Papers 11698, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Risk Assessment Model for Banks," OFRC Working Papers Series 2004fe11, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
  6. Martin Cihák, 2007. "Introduction to Applied Stress Testing," IMF Working Papers 07/59, International Monetary Fund. [Downloadable!]
  7. cipollini, andrea & missaglia, giuseppe, 2007. "Dynamic Factor analysis of industry sector default rates and implication for Portfolio Credit Risk Modelling," MPRA Paper 3582, University Library of Munich, Germany. [Downloadable!]
  8. C.G. de vries, 2004. "The simple economics of bank fragility," WO Research Memoranda (discontinued) 755, Netherlands Central Bank, Research Department. [Downloadable!]
    Other versions:
  9. Simon Wells, . "Financial interlinkages in the United Kingdom's interbank market and the risk of contagion," Bank of England working papers 230, Bank of England. [Downloadable!]
  10. Lelyveld, Iman van & Liedorp, Franka, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," MPRA Paper 806, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  11. Andrea Cipollini & Giuseppe Missaglia, 2007. "Dynamic Factor analysis of industry sector default rates and implication for Portfolio Credit Risk Modelling," Center for Economic Research (RECent) 007, University of Modena and Reggio E., Dept. of Economics. [Downloadable!]
  12. Hałaj, Grzegorz, 2006. "Contagion effect in banking system - measures based on randomised loss scenarios," MPRA Paper 525, University Library of Munich, Germany. [Downloadable!]
  13. Louise Allsopp, 2003. "Speculative behaviour, debt default and contagion: A stylised framework of the Latin American Crisis 2001-2002," Reserve Bank of New Zealand Discussion Paper Series DP2003/10, Reserve Bank of New Zealand. [Downloadable!]
  14. Gabriel Jiménez & Javier Mencía, 2007. "Modeling the distribution of credit losses with observable and latent factors," Banco de España Working Papers 0709, Banco de España. [Downloadable!]
  15. Eichberger, Jürgen & Summer, Martin, 2004. "Bank Capital, Liquidity and Systemic Risk," Sonderforschungsbereich 504 Publications 04-45, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
    Other versions:
  16. Rodrigo Cifuentes & Gianluigi Ferrucci & Hyun Song Shin, . "Liquidity risk and contagion," Bank of England working papers 264, Bank of England. [Downloadable!]
  17. Paolo Emilio Mistrulli, 2007. "Assessing financial contagion in the interbank market: Maximum entropy versus observed interbank lending patterns," Temi di discussione (Economic working papers) 641, Bank of Italy, Economic Research Department. [Downloadable!]
  18. Elsinger, Helmut & Lehar, Alfred & Summer, Martin, 2005. "Using Market Information for Banking System Risk Assessment," MPRA Paper 817, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  19. Lelyveld, Iman van & Liedorp, Franka, 2004. "Interbank Contagion in the Dutch Banking Sector," MPRA Paper 651, University Library of Munich, Germany, revised 11 Jul 2005. [Downloadable!]
    Other versions:
  20. Charles A.E. Goodhart & Pojanart Sunirand & Dimitrios P. Tsomocos, 2004. "A Time Series Analysis of Financial Fragility in the UK Banking System," OFRC Working Papers Series 2004fe18, Oxford Financial Research Centre. [Downloadable!]
    Other versions:
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