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Towards a Framework for Quantifying Systemic Stability

  • Piergiorgio Alessandri

    (Bank of England)

  • Prasanna Gai

    (Australian National University)

  • Sujit Kapadia

    (Bank of England)

  • Nada Mora

    (Bank of England)

  • Claus Puhr

    (Oesterreichische Nationalbank)

This paper describes a prototype quantitative framework for gauging systemic risk which explicitly characterizes banks’ balance sheets and allows for macro credit risk, interest income risk, market risk, network interactions, and asset-side feedback effects. In presenting our results, we focus on projections for systemwide banking assets in the United Kingdom, considering both unconditional distributions and stress scenarios.We show how a combination of extreme credit and trading losses can precipitate fundamental defaults and trigger contagious default associated with network effects and fire sales of distressed assets. Despite the joint normality of all risk factors, the model generates a bimodal asset distribution.

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Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

Volume (Year): 5 (2009)
Issue (Month): 3 (September)
Pages: 47-81

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Handle: RePEc:ijc:ijcjou:y:2009:q:3:a:2
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