Systemic Risk in the Italian Banking Industry

Abstract

Systemic risk is the risk of a collapse of the entire financial system, typically triggered by the default of one, or more, interconnected financial institutions. In this paper, we estimate the systemic risk contribution of Italian-listed banks for the period 2000–2011. We follow a methodology first proposed by Adrian and Brunnermeier and measure banks' contribution to systemic risk by ΔCoVaR, which measures the contribution of bank i to the financial system VaR when bank i is in a state of distress. We define ‘the system’ as the set of Italian-listed banks in the sample. First, we find that the information contained in ΔCoVaR is different from that contained in the VaR. Therefore, regulators should take it into account in order to monitor the systemic risk posed by banks. Second, recent policy debate has focused on the danger posed by large banks and on the need to curb their size. We find that size is indeed the main predictor of a bank contribution to systemic risk. However, in the post-Lehman period, leverage is also an important predictor of systemic risk. Consequently, any financial regulation designed only to curb banks' size could not completely eliminate systemic risk because it is exactly in crisis times that leverage becomes relevant. Hence, we conclude that ΔCoVaR is a very useful policy tool for regulators that can estimate which factors are more relevant in terms of contribution to systemic risk

Determinants of Systemic Risk: The Case of Egyptian Banks

“…Results don't support the TBTF rule, as they indicate that large banks has a higher systemic risk, while size effect has been supported by works of Adrian & Brunnermeier (2011), Borri et al (2014 and Laeven et al (2014). Moreover, banks with high financial stability seem to have lower systemic risk to a certain level.…”

“…Following this methodology, Borri et al (2014) estimates the systemic risk contribution of Italian-listed banks for the period from 2000 to2011. Findings show that size is the main predictor of a bank contribution to systemic risk.…”

“…Besides, Kaufman (1995) believes that systemic risk is "the risk of chain reactions that cause collapse of interconnected institutions". Borri et al (2014) defines systemic risk, as the risk of a collapse of the entire financial system, typically triggered by the default of one, or more, interconnected financial institutions. Adrian & Brunnermeier (2011) proposes CoVar, as a measure for systemic risk, that denotes the value at risk (VaR) of the financial system conditional on institutions being in distress, where an institution's contribution to systemic risk is the difference between CoVaR conditional on the institution being in distress and CoVaR in the median state of the institution, while traditional risk measures focus on the risk of individual institutions.…”

Exploring the Systemic Risk of Domestic Banks with ΔCoVaR and Elastic-Net

“…After having estimated the ΔCoVaR, we explore the time-varying determinants of the contribution of banks to systemic risk by using balance sheet and market-based variables. We update and extend the analysis of Borri et al ( 2014 ) in which they investigate several possible predictors of banks’ contribution to systemic risk.…”

House prices, (un)affordability and systemic risk

“…∆CoVaR has already become a popular measure of systemic risk and has been employed in many applications (see e.g. Fong et al, 2009;Borri et al, 2014;Gauthier et al, 2012;Ugolini, 2017; de Mendonça and da Silva, 2018).…”