How useful is the Marginal Expected Shortfall for the measurement of systemic exposure? A practical assessment
We explore the practical relevance from a supervisor's perspective of a popular market-based indicator of the exposure of a financial institution to systemic risk, the marginal expected shortfall (MES). The MES of an institution can be defined as its expected equity loss when the market itself is in its left tail. We estimate the dynamic MES recently proposed by Brownlees and Engle (2011) for a panel of 65 large US banks over the last decade and a half. Running panel regressions of the MES on bank characteristics, we first find that the MES can be roughly rationalized in terms of standard balance sheet indicators of bank financial soundness and systemic importance. We then ask whether the cross section of the MES can help to identify ex ante, i.e. before a crisis unfolds, which institutions are the more likely to suffer the most severe losses ex post, i.e. once it has unfolded. Unfortunately, using the recent crisis as a natural experiment, we find that standard balance-sheet metrics like the tier one solvency ratio are better able than the MES to predict equity losses conditionally to a true crisis.
|Date of creation:||2011|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://www.banque-france.fr/
More information through EDIRC
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.:
- Miguel A. Segoviano & Charles Goodhart, 2009. "Banking stability measures," LSE Research Online Documents on Economics 24416, London School of Economics and Political Science, LSE Library.
- Zhang, Longmei, 2009. "Bank capital regulation, the lending channel and business cycles," Discussion Paper Series 1: Economic Studies 2009,33, Deutsche Bundesbank, Research Centre.
- Purnanandam, Amiyatosh, 2007. "Interest rate derivatives at commercial banks: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1769-1808, September.
- Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006.
"Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns,"
Journal of Financial Econometrics,
Society for Financial Econometrics, vol. 4(4), pages 537-572.
- Sheppard, Kevin & Cappiello, Lorenzo & Engle, Robert F., 2003. "Asymmetric dynamics in the correlations of global equity and bond returns," Working Paper Series 0204, European Central Bank.
- Enrica Detragiache & Thierry Tressel & Asli DemirgÃ¼Ã§-Kunt, 2006.
"Bankingon the Principles; Compliance with Basel Core Principles and Bank Soundness,"
IMF Working Papers
06/242, International Monetary Fund.
- Demirgüç-Kunt, AslI & Detragiache, Enrica & Tressel, Thierry, 2008. "Banking on the principles: Compliance with Basel Core Principles and bank soundness," Journal of Financial Intermediation, Elsevier, vol. 17(4), pages 511-542, October.
- Demirguc-Kunt, Asli & Detragiache, Enrica & Tressel, Thierry, 2006. "Banking on the principles : compliance with Basel Core Principles and bank soundness," Policy Research Working Paper Series 3954, The World Bank.
- Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
- Xin Huang & Hao Zhou & Haibin Zhu, 2009.
"A framework for assessing the systemic risk of major financial institutions,"
Finance and Economics Discussion Series
2009-37, Board of Governors of the Federal Reserve System (U.S.).
- Huang, Xin & Zhou, Hao & Zhu, Haibin, 2009. "A framework for assessing the systemic risk of major financial institutions," Journal of Banking & Finance, Elsevier, vol. 33(11), pages 2036-2049, November.
- Xin Huang & Hao Zhou & Haibin Zhu, 2009. "A Framework for Assessing the Systemic Risk of Major Financial Institutions," BIS Working Papers 281, Bank for International Settlements.
- John H. Boyd & Gianni De Nicolã, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, 06.
- Delis, Manthos D. & Kouretas, Georgios P., 2011.
"Interest rates and bank risk-taking,"
Journal of Banking & Finance,
Elsevier, vol. 35(4), pages 840-855, April.
- Nikola Tarashev & Mathias Drehmann, 2011.
"Measuring the systemic importance of interconnected banks,"
BIS Working Papers
342, Bank for International Settlements.
- Drehmann, Mathias & Tarashev, Nikola, 2013. "Measuring the systemic importance of interconnected banks," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 586-607.
- Luc Laeven & Ross Levine, 2008.
"Bank Governance, Regulation, and Risk Taking,"
NBER Working Papers
14113, National Bureau of Economic Research, Inc.
- Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers dp627, Financial Markets Group.
- Christian GOURIEROUX & Alain MONFORT, 2011. "Allocating Systematic and Unsystematic Risks in a Regulatory Perspective," Working Papers 2011-04, Centre de Recherche en Economie et Statistique.
- Buch, Claudia M. & Eickmeier, Sandra & Prieto, Esteban, 2010.
"Macroeconomic factors and micro-level bank risk,"
Discussion Paper Series 1: Economic Studies
2010,20, Deutsche Bundesbank, Research Centre.
- Claudia M. Buch & Sandra Eickmeier & Esteban Prieto, 2014. "Macroeconomic Factors and Microlevel Bank Behavior," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(4), pages 715-751, 06.
- Olivier SCAILLET, 2004. "Nonparametric Estimation of Conditional Expected Shortfall," FAME Research Paper Series rp112, International Center for Financial Asset Management and Engineering.
- Engle, Robert, 2002. "Dynamic Conditional Correlation: A Simple Class of Multivariate Generalized Autoregressive Conditional Heteroskedasticity Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(3), pages 339-50, July.
- Acharya, Viral V & Pedersen, Lasse H & Philippon, Thomas & Richardson, Matthew P, 2012.
"Measuring Systemic Risk,"
CEPR Discussion Papers
8824, C.E.P.R. Discussion Papers.
- Rabemananjara, R & Zakoian, J M, 1993. "Threshold Arch Models and Asymmetries in Volatility," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 8(1), pages 31-49, Jan.-Marc.
- Diana Hancock & James A. Wilcox, 1994. "Bank Capital and the Credit Crunch: The Roles of Risk-Weighted and Unweighted Capital Regulations," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 22(1), pages 59-94.
- Mathias Drehmann & Nikola Tarashev, 2011. "Systemic importance: some simple indicators," BIS Quarterly Review, Bank for International Settlements, March.
- O. De Jonghe, 2009.
"Back to the Basics in Banking? A Micro-Analysis of Banking System Stability,"
Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium
09/579, Ghent University, Faculty of Economics and Business Administration.
- De Jonghe, Olivier, 2010. "Back to the basics in banking? A micro-analysis of banking system stability," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 387-417, July.
- Olivier De Jonghe, 2009. "Back to the basics in banking ? A micro-analysis of banking system stability," Working Paper Research 167, National Bank of Belgium.
- Hyun Song Shin, 2009. "Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 101-19, Winter.
- Viral Acharya & Robert Engle & Matthew Richardson, 2012. "Capital Shortfall: A New Approach to Ranking and Regulating Systemic Risks," American Economic Review, American Economic Association, vol. 102(3), pages 59-64, May.
- Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, vol. 90(3), pages 407-428, June.
- John C. Driscoll & Aart C. Kraay, 1998. "Consistent Covariance Matrix Estimation With Spatially Dependent Panel Data," The Review of Economics and Statistics, MIT Press, vol. 80(4), pages 549-560, November.
- repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:bfr:banfra:348. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael brassart)
If references are entirely missing, you can add them using this form.