Elsinger, Helmut and Lehar, Alfred and Summer, Martin (2005): Using Market Information for Banking System Risk Assessment. Published in: International Journal of Central Banking , Vol. Volume, No. Number 1 (8. March 2006): pp. 137-165.
Download (270kB) | Preview
We propose a new method for the analysis of systemic stability of a banking system relying mostly on market data. We model both asset correlations and interlinkages from interbank borrowing so that our analysis gauges two major sources of systemic risk: correlated exposures and mutual credit relations that may cause domino effects of insolvencies. We apply our method to a data set of the ten major UK banks and analyze insolvency risk over a one-year horizon. We also suggest a stress-testing procedure by analyzing the conditional asset return distribution that results from the hypothetical failure of individual institutions in this system. Rather than looking at individual bank defaults ceteris paribus, we take the change in the asset return distribution and the resulting change in the risk of all other banks into account. This takes previous stress tests of interlinkages a substantial step further.
|Item Type:||MPRA Paper|
|Original Title:||Using Market Information for Banking System Risk Assessment|
|Keywords:||Systemic Risk; Financial Stability; Stress Testing; Interbank Market|
|Subjects:||G - Financial Economics > G0 - General > G00 - General
G - Financial Economics > G0 - General
|Depositing User:||Terry Woodard|
|Date Deposited:||21. Nov 2006|
|Last Modified:||12. Feb 2013 15:13|
Allen, Franklin, and Douglas Gale. 2000. “Financial Contagion.” Journal of Political Economy 108 (1): 1–34.
Angelini, Paolo, G. Maresca, and Daniela Russo. 1996. “Systemic Risk in the Netting System.” Journal of Banking and Finance 20 (5): 853–86.
Black, Fischer, and Myron Scholes. 1973. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy 8: 1637–59.
Blien, Uwe, and Friedrich Graef. 1997. “Entropy Optimizing Methods for the Estimation of Tables.” In Classification, Data Analysis,and Data Highways, ed. Ingo Balderjahn, Rudolf Mather,and Martin Schader. Berlin: Springer Verlag.
Cocco, Joao F., Francisco J. Gomes, and Nuno C. Martins. 2004. “Lending Relationships in the Interbank Market.” IFA Working Paper No. 384.
Degryse, Hans, and Gregory Nguyen. 2004. “Interbank Exposures: An Empirical Analysis of Systemic Risk in the Belgian Banking System.” Working Paper, National Bank of Belgium.
Duan, Jin-Chuan. 1994. “Maximum Likelihood Estimation Using Price Data of the Derivative Contract.” Mathematical Finance 4 (2): 155–67.2000. “Correction: Maximum Likelihood Estimation Using Price Data of the Derivative Contract.” Mathematical Finance 10(4):61–62.
Eisenberg, Larry, and Thomas Noe. 2001. “Systemic Risk in Financial Systems.” Management Science 47:236–49.
Elsinger, Helmut, Alfred Lehar, and Martin Summer. 2004. “Risk Assessment for Banking Systems.” Working Paper, University of Vienna. 2005. “Using Market Information for Banking System Risk Assessment.” SSRN Working Paper, http://ssrn.com/abstract=787929.
Fang, Shu-Cherng, Jay R. Rajasekera, and H.-S. Jacob Tsao. 1997. Entropy Optimization and Mathematical Programming. Boston, London, Dordrecht: Kluwer Academic Publishers.
Furfine, Craig. 2003. “Interbank Exposures: Quantifying the Risk of Contagion.” Journal of Money, Credit, and Banking 35 (1):111–28.
Humphrey, David B. 1986. “Payments Finality and Risk of Settlement Failure.” In Technology and the Regulation of Financial Markets: Securities, Futures and Banking, ed. Anthony Saunders and Lawrence J. White. Lexington, MA: Lexington Books.
Lehar, Alfred. 2005. “Measuring Systemic Risk: A Risk Management Approach.” Journal of Banking and Finance 29 (10): 2577–2603.
Merton, Robert C. 1973. “A Rational Theory of Option Pricing.” Bell Journal of Economics and Management Science 4: 141–83.1974. “On the Pricing of Corporate Debt: The Risk Structure of Interest Rates.” Journal of Finance 29 (2): 449–70.
Mistrulli, P. E. 2005. “Interbank Lending Patterns and Financial Contagion.” Mimeo, Banca d’Italia.
Nicolo, Gianni De, and Myron L. Kwast. 2002. “Systemic Risk and Financial Consolidation: Are They Related?” Journal of Banking and Finance 26 (5): 861–80.
Ramanathan, Ramu. 1993. Statistical Methods in Econometrics. San Diego: Academic Press.
Shibut, Lynn. 2002. “Should Bank Liability Structure Influence Deposit Insurance Pricing?” FDIC Working Paper No. 2002-01.
Upper, Christian, and Andreas Worms. 2004. “Estimating Bilateral Exposures in the German Interbank Market: Is There a Danger of Contagion?” European Economic Review 48:827–49.
VanLelyveld, Iman, and Frank Liedorp. 2004. “Interbank Contagion in the Dutch Banking Sector.” DNB Working Paper Series.
Wells, Simon. 2004. “Financial Interlinkages in the United Kingdom’s Interbank Market and the Risk of Contagion.” Working Paper, Bank of England.