Using Market Information for Banking System Risk Assessment
AbstractWe propose a new method for the analysis of systemic stability of a banking system relying mostly on market data. We model both asset correlations and interlinkages from interbank borrowing so that our analysis gauges two major sources of systemic risk: correlated exposures and mutual credit relations that may cause domino effects of insolvencies. We apply our method to a data set of the ten major UK banks and analyze insolvency risk over a one-year horizon. We also suggest a stress-testing procedure by analyzing the conditional asset return distribution that results from the hypothetical failure of individual institutions in this system. Rather than looking at individual bank defaults ceteris paribus, we take the change in the asset return distribution and the resulting change in the risk of all other banks into account. This takes previous stress tests of interlinkages a substantial step further.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 817.
Date of creation: 19 Sep 2005
Date of revision:
Publication status: Published in International Journal of Central Banking Number 1.Volume(2006): pp. 137-165
Systemic Risk; Financial Stability; Stress Testing; Interbank Market;
Other versions of this item:
- Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Using Market Information for Banking System Risk Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 2(1), March.
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-11-25 (All new papers)
- NEP-BAN-2006-11-25 (Banking)
- NEP-RMG-2006-11-25 (Risk Management)
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