Assessment of the Systemic Risk in the German Banking Industry

In this chapter, systemic risk refers in a very narrow sense to a risk of breakdown or major dysfunction in a banking system. Some researchers use the term to include the potential insolvency of a major entity in the financial system or its component. In this work, financial indicators and the approach of Conditional Value-at-Risk (CoVaR) is used to empirically analyse the systemic risk for the German financial system. Results indicate that the differences in the systemic risk assessment by using composite measure and delta CoVaR may occur as the result of the composite measure being determined by selected financial ratios, the adopted normalisation and ordering method, and the group of banks. The relationship between a bank’s financial condition and systemic risk is not obvious for complex financial systems, and both approaches use data of different frequency, which affects quality of the assessment.