IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/20131546.html
   My bibliography  Save this paper

How useful is the marginal expected shortfall for the measurement of systemic exposure? A practical assessment

Author

Listed:
  • Idier, Julien
  • Lamé, Gildas
  • Mésonnier, Jean-Stéphane

Abstract

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. JEL Classification: C5, E44, G2

Suggested Citation

  • Idier, Julien & Lamé, Gildas & Mésonnier, Jean-Stéphane, 2013. "How useful is the marginal expected shortfall for the measurement of systemic exposure? A practical assessment," Working Paper Series 1546, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:20131546
    Note: 658898
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp1546.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Viral V. Acharya & Lasse H. Pedersen & Thomas Philippon & Matthew Richardson, 2017. "Measuring Systemic Risk," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 2-47.
    2. 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.
    3. 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, March.
    4. Lorenzo Cappiello & Robert F. Engle & Kevin Sheppard, 2006. "Asymmetric Dynamics in the Correlations of Global Equity and Bond Returns," Journal of Financial Econometrics, Oxford University Press, vol. 4(4), pages 537-572.
    5. Charles Goodhart & Miguel Segoviano, 2009. "Banking Stability Measures," FMG Discussion Papers dp627, Financial Markets Group.
    6. Zhang, Longmei, 2009. "Bank capital regulation, the lending channel and business cycles," Discussion Paper Series 1: Economic Studies 2009,33, Deutsche Bundesbank.
    7. Mr. C. A. E. Goodhart & Miguel A. Segoviano, 2009. "Banking Stability Measures," IMF Working Papers 2009/004, International Monetary Fund.
    8. 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.
    9. 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, June.
    10. Olivier SCAILLET, 2004. "Nonparametric Estimation of Conditional Expected Shortfall," FAME Research Paper Series rp112, International Center for Financial Asset Management and Engineering.
    11. Drehmann, Mathias & Tarashev, Nikola, 2013. "Measuring the systemic importance of interconnected banks," Journal of Financial Intermediation, Elsevier, vol. 22(4), pages 586-607.
    12. John H. Boyd & Gianni De Nicoló, 2005. "The Theory of Bank Risk Taking and Competition Revisited," Journal of Finance, American Finance Association, vol. 60(3), pages 1329-1343, June.
    13. 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.
    14. 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.
    15. Segoviano, Miguel A. & Goodhart, Charles, 2009. "Banking stability measures," LSE Research Online Documents on Economics 24416, London School of Economics and Political Science, LSE Library.
    16. 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.
    17. repec:fip:fedhpr:y:2010:i:may:p:65-71 is not listed on IDEAS
    18. Purnanandam, Amiyatosh, 2007. "Interest rate derivatives at commercial banks: An empirical investigation," Journal of Monetary Economics, Elsevier, vol. 54(6), pages 1769-1808, September.
    19. Laeven, Luc & Levine, Ross, 2009. "Bank governance, regulation and risk taking," Journal of Financial Economics, Elsevier, vol. 93(2), pages 259-275, August.
    20. 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.
    21. 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.
    22. 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.
    23. Christian GOURIEROUX & Alain MONFORT, 2011. "Allocating Systematic and Unsystematic Risks in a Regulatory Perspective," Working Papers 2011-04, Center for Research in Economics and Statistics.
    24. 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 339-350, July.
    25. 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.
    26. 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 101-119, Winter.
    27. Mathias Drehmann & Nikola Tarashev, 2011. "Systemic importance: some simple indicators," BIS Quarterly Review, Bank for International Settlements, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Danielsson, Jon & James, Kevin R. & Valenzuela, Marcela & Zer, Ilknur, 2016. "Model risk of risk models," Journal of Financial Stability, Elsevier, vol. 23(C), pages 79-91.
    2. Antonio Di Cesare & Anna Rogantini Picco, 2018. "A Survey of Systemic Risk Indicators," Questioni di Economia e Finanza (Occasional Papers) 458, Bank of Italy, Economic Research and International Relations Area.
    3. Löffler, Gunter & Raupach, Peter, 2013. "Robustness and informativeness of systemic risk measures," Discussion Papers 04/2013, Deutsche Bundesbank.
    4. Drakos, Anastassios A. & Kouretas, Georgios P., 2015. "Bank ownership, financial segments and the measurement of systemic risk: An application of CoVaR," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 127-140.
    5. Reboredo, Juan C. & Ugolini, Andrea, 2015. "A vine-copula conditional value-at-risk approach to systemic sovereign debt risk for the financial sector," The North American Journal of Economics and Finance, Elsevier, vol. 32(C), pages 98-123.
    6. Kamila Sommer, 2014. "Fertility Choice in a Life Cycle Model with Idiosyncratic Uninsurable Earnings Risk," Finance and Economics Discussion Series 2014-32, Board of Governors of the Federal Reserve System (U.S.).
    7. Markus Brunnermeier & Simon Rother & Isabel Schnabel & Itay Goldstein, 2020. "Asset Price Bubbles and Systemic Risk," The Review of Financial Studies, Society for Financial Studies, vol. 33(9), pages 4272-4317.
    8. Cincinelli, Peter & Pellini, Elisabetta & Urga, Giovanni, 2021. "Leverage and systemic risk pro-cyclicality in the Chinese financial system," International Review of Financial Analysis, Elsevier, vol. 78(C).
    9. Yang, Hsin-Feng & Liu, Chih-Liang & Yeutien Chou, Ray, 2020. "Bank diversification and systemic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 311-326.
    10. Maghyereh, Aktham & Abdoh, Hussein, 2021. "The effect of structural oil shocks on bank systemic risk in the GCC countries," Energy Economics, Elsevier, vol. 103(C).
    11. Silva, Walmir & Kimura, Herbert & Sobreiro, Vinicius Amorim, 2017. "An analysis of the literature on systemic financial risk: A survey," Journal of Financial Stability, Elsevier, vol. 28(C), pages 91-114.
    12. Bostandzic, Denefa & Weiß, Gregor N.F., 2018. "Why do some banks contribute more to global systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 35(PA), pages 17-40.
    13. Andre R. Neveu, 2018. "A survey of network-based analysis and systemic risk measurement," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 13(2), pages 241-281, July.
    14. O. de Bandt & J.-C. Héam & C. Labonne & S. Tavolaro, 2013. "Measuring Systemic Risk in a Post-Crisis World," Débats économiques et financiers 6, Banque de France.
    15. M. Zulkifli Salim & Kevin Daly, 2021. "Modelling Systemically Important Banks vis-à-vis the Basel Prudential Guidelines," JRFM, MDPI, vol. 14(7), pages 1-20, June.
    16. Abdelkader Derbali & Slaheddine Hallara, 2016. "Measuring systemic risk of Greek banks: New approach by using the epidemic model “SEIR”," Cogent Business & Management, Taylor & Francis Journals, vol. 3(1), pages 1153864-115, December.
    17. Kurter, Zeynep O., 2022. "How macroeconomic conditions affect systemic risk in the short and long-run?," The Warwick Economics Research Paper Series (TWERPS) 1407, University of Warwick, Department of Economics.
    18. Kolari, James W. & López-Iturriaga, Félix J. & Sanz, Ivan Pastor, 2020. "Measuring systemic risk in the U.S. Banking system," Economic Modelling, Elsevier, vol. 91(C), pages 646-658.
    19. Qin, Xiao & Zhou, Chen, 2021. "Systemic risk allocation using the asymptotic marginal expected shortfall," Journal of Banking & Finance, Elsevier, vol. 126(C).
    20. Borri, Nicola & Giorgio, Giorgio di, 2022. "Systemic risk and the COVID challenge in the european banking sector," Journal of Banking & Finance, Elsevier, vol. 140(C).

    More about this item

    Keywords

    balance sheet ratios; MES; panel; systemic risk; tail correlation;
    All these keywords.

    JEL classification:

    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G2 - Financial Economics - - Financial Institutions and Services

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:20131546. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.