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Monitoring Systemic Risk Basedon Dynamic Thresholds

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  • Mr. Kasper Lund-Jensen

Abstract

Successful implementation of macroprudential policy is contingent on the ability to identify and estimate systemic risk in real time. In this paper, systemic risk is defined as the conditional probability of a systemic banking crisis and this conditional probability is modeled in a fixed effect binary response model framework. The model structure is dynamic and is designed for monitoring as the systemic risk forecasts only depend on data that are available in real time. Several risk factors are identified and it is hereby shown that the level of systemic risk contains a predictable component which varies through time. Furthermore, it is shown how the systemic risk forecasts map into crisis signals and how policy thresholds are derived in this framework. Finally, in an out-of-sample exercise, it is shown that the systemic risk estimates provided reliable early warning signals ahead of the recent financial crisis for several economies.

Suggested Citation

  • Mr. Kasper Lund-Jensen, 2012. "Monitoring Systemic Risk Basedon Dynamic Thresholds," IMF Working Papers 2012/159, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2012/159
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    References listed on IDEAS

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    Cited by:

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    2. Eidenberger, Judith & Neudorfer, Benjamin & Sigmund, Michael & Stein, Ingrid, 2014. "What predicts financial (in)stability? A Bayesian approach," Discussion Papers 36/2014, Deutsche Bundesbank.
    3. Ouyang, Alice Y. & Guo, Shen, 2019. "Macro-prudential policies, the global financial cycle and the real exchange rate," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 147-167.
    4. Bruno, Valentina & Shin, Hyun Song, 2015. "Capital flows and the risk-taking channel of monetary policy," Journal of Monetary Economics, Elsevier, vol. 71(C), pages 119-132.
    5. Judith Eidenberger & Benjamin Neudorfer & Michael Sigmund & Ingrid Stein, 2013. "Quantifying Financial Stability in Austria, New Tools for Macroprudential Supervision," Financial Stability Report, Oesterreichische Nationalbank (Austrian Central Bank), issue 26, pages 62-81.
    6. Rey, Hélène, 2015. "Dilemma not Trilemma: The Global Financial Cycle and Monetary Policy Independence," CEPR Discussion Papers 10591, C.E.P.R. Discussion Papers.
    7. Valentina Flamini & Pierluigi Bologna & Fabio Di Vittorio & Rasool Zandvakil, 2019. "Credit Cycle and Capital Buffers in Central America, Panama, and the Dominican Republic," IMF Working Papers 2019/039, International Monetary Fund.
    8. Mariña Martínez-Malvar & Laura Baselga-Pascual, 2020. "Bank Risk Determinants in Latin America," Risks, MDPI, vol. 8(3), pages 1-20, September.
    9. Seung Mo Choi & Laura E. Kodres & Jing Lu, 2021. "Friend or Foe? Cross-Border Links, Contagious Banking Crises, and Joint Use of Macroprudential Policies," Journal of Financial Services Research, Springer;Western Finance Association, vol. 60(1), pages 55-79, August.
    10. Hamdaoui, Mekki, 2016. "Are systemic banking crises in developed and developing countries predictable?," Journal of Multinational Financial Management, Elsevier, vol. 37, pages 114-138.

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