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What Drives Systemic Bank Risk in Europe: the balance sheet effect

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  • Wosser, Michael

    (Central Bank of Ireland)

Abstract

Since the 2008 global financial crisis (GFC) several systemic risk measures (SRMs) have gained traction in the literature. This paper examines whether Delta-CoVaR (?CoVaR) is relevant in the context of European banks and compares risk rankings against those found using marginal expected shortfall (MES). The analysis reveals that a cluster of large banks, operating in one particular country, is the principal contributor to financial system risk, if measured by ?CoVaR. When the direction of risk flow is reversed, i.e. from the system to the institution (via MES), a second cluster of banks, headquartered in a different jurisdiction, would be most affected by a large and systemic financial shock. The analysis reveals that future realisations of systemic risk is strongly associated with institution size, maturity mismatch, non-performing loans and non-interest-to-interest-income ratios. However, in certain cases, the relationship depends upon the systemic risk measure used. For example, forward bank leverage appears correlated with MES but not with ?CoVaR.

Suggested Citation

  • Wosser, Michael, 2017. "What Drives Systemic Bank Risk in Europe: the balance sheet effect," Research Technical Papers 08/RT/17, Central Bank of Ireland.
  • Handle: RePEc:cbi:wpaper:08/rt/17
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    File URL: https://www.centralbank.ie/docs/default-source/publications/research-technical-papers/08rt17---what-drives-systemic-bank-risk-in-europe.pdf?sfvrsn=4
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    References listed on IDEAS

    as
    1. Glenn Hoggarth & Steffen Sorensen & Lea Zicchino, 2005. "Stress tests of UK banks using a VAR approach," Bank of England working papers 282, Bank of England.
    2. Ashoka Mody & Damiano Sandri, 2012. "The eurozone crisis: how banks and sovereigns came to be joined at the hip," Economic Policy, CEPR;CES;MSH, vol. 27(70), pages 199-230, April.
    3. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
    4. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2010. "Measuring systemic risk," Working Paper 1002, Federal Reserve Bank of Cleveland.
    5. Kremer, Manfred & Lo Duca, Marco & Holló, Dániel, 2012. "CISS - a composite indicator of systemic stress in the financial system," Working Paper Series 1426, European Central Bank.
    6. Salleo, Carmelo & Homar, Timotej & Kick, Heinrich, 2016. "Making sense of the EU wide stress test: a comparison with the SRISK approach," Working Paper Series 1920, European Central Bank.
    7. repec:ecb:ecbwps:20111426 is not listed on IDEAS
    8. Viral V. Acharya, 2010. "Measuring systemic risk," Proceedings 1140, Federal Reserve Bank of Chicago.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Systemic banking crisis; Systemic risk measurement; ?CoVaR; MES; Bank Balance Sheet; Macroprudential policy;

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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