Predicting systemic risk of banks: a machine learning approach

Abstract

Purpose This study aims to analyse the systemic risk emitted by all publicly listed commercial banks in a key emerging economy, India. Design/methodology/approach The study makes use of the Tobias and Brunnermeier (2016) estimator to quantify the systemic risk (ΔCoVaR) that banks contribute to the system. The methodology addresses a classification problem based on the probability that a particular bank will emit high systemic risk or moderate systemic risk. The study applies machine learning models such as logistic regression, random forest (RF), neural networks and gradient boosting machine (GBM) and addresses the issue of imbalanced data sets to investigate bank’s balance sheet features and bank’s stock features which may potentially determine the factors of systemic risk emission. Findings The study reports that across various performance matrices, the authors find that two specifications are preferred: RF and GBM. The study identifies lag of the estimator of systemic risk, stock beta, stock volatility and return on equity as important features to explain emission of systemic risk. Practical implications The findings will help banks and regulators with the key features that can be used to formulate the policy decisions. Originality/value This study contributes to the existing literature by suggesting classification algorithms that can be used to model the probability of systemic risk emission in a classification problem setting. Further, the study identifies the features responsible for the likelihood of systemic risk.

Machine Learning Projections for Human Development Index Anticipation

“…The refined dataset, which resulted from the initial two steps, was utilized in the evaluation of a random forest prediction model [12]. The "caret" package [13] was employed to partition the data into two segments. It was decided that 90% of the dataset would be allocated for training purposes, while the remaining 10% would be reserved for testing.…”