Using Market Information for Banking System Risk Assessment
by Helmut Elsinger a, Alfred Leharb, and Martin Summerc
Abstract
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.
JEL Codes: G21, C15, C81, E44.
Full article (PDF, 29 pages 264 kb)
aDepartment of Finance, University of Vienna
bHaskayne School of Business, University of Calgary
cEconomic Studies Division, Oesterreichische Nationalbank
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