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Carlo Bellavite Pellegrini, Laura Pellegrini and Emiliano Sironi

Systemic risk has been one of the most interesting issues in banking and financial literature during the last years, particularly in evaluating its effects on the…

Abstract

Systemic risk has been one of the most interesting issues in banking and financial literature during the last years, particularly in evaluating its effects on the stability of the whole financial system during crises. Differently from other studies which analyze systemic risk focusing on European countries, we explore the determinant of systemic risk in other regional or continental banking systems, as Latin America. Using the CoVaR approach proposed by Adrian and Brunnermeier (2016), we study the impact of corporate variables on systemic risk on a sample of 30 Latin American banks belonging to seven countries, continuously listed from 2002Q1 to 2015Q4. We investigate the contribution of the corporate variables over different economic periods: the Subprime crisis (2007Q3–2008Q3), the European Great Financial Depression (2008Q4–2010Q2), and the Sovereign debt crisis (2010Q3–2012Q3).

Details

Asia-Pacific Contemporary Finance and Development
Type: Book
ISBN: 978-1-78973-273-3

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Book part

Firano Zakaria

In this paper, we search to evaluate the systemic risk of the Moroccan banking sector. Indeed, we concentrate on the analysis and the evaluation on transverse dimension of…

Abstract

In this paper, we search to evaluate the systemic risk of the Moroccan banking sector. Indeed, we concentrate on the analysis and the evaluation on transverse dimension of the systemic. From this point of view, two approaches were used. First is based on the estimate on value at risk conditional allowing to measure the systemic importance of each banking institution. In addition, the second approach uses the heteroscedasticity models in order to consider the conditional correlations, making it possible, to measure the dependence between the Moroccan banks and with the whole of the financial system. The results obtained with through these two approaches confirm that ATW, BMCI and the BMCE are the most systemic banks in Moroccan banking system and who can initiate a systemic crisis. On another register and by using the conditional correlations of each bank we built an index of systemic risk. Moreover, a macrofinancial model was developed, connecting the index of the systemic risk and the principal macroeconomic variables. This model affirmed that the contagion dimension of systemic risk is procyclical.

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Overlaps of Private Sector with Public Sector around the Globe
Type: Book
ISBN: 978-1-78441-956-1

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Article

Stefan Schwerter

The financial crisis 2007‐2009 calls for a regulatory response. A crucial element of this task is the treatment of systemic risk. Basel III gains centre stage in this…

Abstract

Purpose

The financial crisis 2007‐2009 calls for a regulatory response. A crucial element of this task is the treatment of systemic risk. Basel III gains centre stage in this process. Thus, the purpose of this paper is to evaluate Basel III, examining its ability to reduce systemic risk.

Design/methodology/approach

The paper highlights the importance of reducing systemic risk to achieve the goal of overall financial stability. By first focusing on the theoretical foundations of systemic risk, this paper explores and analyzes the crucial aspects of this almost impalpable risk type. It further investigates the current regulation of systemic risk, clearly showing Basel II's inability to reduce it. Then, it evaluates the Basel Committee's efforts to address these weaknesses through Basel III by investigating its incentives and its ability to reduce obvious drawbacks of Basel II as well as systemic risk factors.

Findings

The findings show that there are still adjustments necessary. Although the development of Basel III is well advanced, providing some stabilizing incentives, there are still issues calling for closer consideration to counter all Basel II drawbacks and systemic risk factors adequately. These include: a risk‐weighted leverage ratio; a more thorough treatment of procyclicality; adjustments for the NSFR (Net Stable Funding ratio); and most importantly, the mandatory issue to internalize negative externalities from financial institutions, that is, the call for pricing systemic risk.

Originality/value

The paper not only examines the new Basel III framework, as a response to the Financial Crisis 2007‐2009, but also draws attention to specific areas which the Basel Committee and regulators need to focus on more thoroughly.

Details

Journal of Financial Regulation and Compliance, vol. 19 no. 4
Type: Research Article
ISSN: 1358-1988

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Article

Sharada Alampalli

The near‐collapse of the world's financial system in 2008 brought into focus significant limitations in the data and analysis tools available to mitigate potential risks

Abstract

Purpose

The near‐collapse of the world's financial system in 2008 brought into focus significant limitations in the data and analysis tools available to mitigate potential risks across the financial system. It has raised calls to provide comprehensive data and adequate tools to identify and relieve systemic risk. In this paper, an infrastructure is proposed to address the need for a new information system in systemic regulation.

Design/methodology/approach

The proposed infrastructure is developed using the Fed's Bank Holding Company Supervision Manual as a guideline. The model uses a data fusion approach that allows integration of inspection data, external data, and other regulatory data of different granularity. A proprietary application known as Decision Making Toolbox (DMT) is being developed with three‐tier architecture.

Findings

The integrated all‐in‐one approach will enhance the efficiency, scope, and quality of studies applied to systemic regulation and will facilitate easy decision making for effective regulation.

Originality/value

This concept integrates data and measures that are needed for systemic regulation. It facilitates easy decision making, by regulators with an integrated all‐in‐one information infrastructure, for effective regulation.

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Article

Sascha Strobl

This study investigates the risk-taking behavior of financial institutions in the USA. Specifically, differences between taking risks that affect primarily the…

Abstract

Purpose

This study investigates the risk-taking behavior of financial institutions in the USA. Specifically, differences between taking risks that affect primarily the shareholders of the institution and risks contributing to the overall systemic risk of the financial sector are examined. Additionally, differences between risk-taking before, during and after the financial crisis of 2007/2008 are examined.

Design/methodology/approach

To analyze the determinants of stand-alone and systemic risk, a generalized linear model including size, governance, charter value, business cycle, competition and control variables is estimated. Furthermore, Granger causality tests are conducted.

Findings

The results show that systemic risk has a positive effect on valuation and that corporate governance has no significant effect on risk-taking. The influence of competition is conditional on the state of the economy and the risk measure used. Systemic risk Granger-causes idiosyncratic risk but not vice versa.

Research limitations/implications

The major limitations of this study are related to the analyzed subset of large financial institutions and important risk-culture variables being omitted.

Practical implications

The broad policy implication of this paper is that systemic risk cannot be lowered by market discipline due to the moral hazard problem. Therefore, regulatory measures are necessary to ensure that individual financial institutions are not endangering the financial system.

Originality/value

This study contributes to the empirical literature on bank risk-taking in several ways. First, the characteristics of systemic risk and idiosyncratic risk are jointly analyzed. Second, the direction of causality of these two risk measures is examined. Moreover, this paper contributes to the discussion of the effect of competition on risk-taking.

Details

The Journal of Risk Finance, vol. 17 no. 4
Type: Research Article
ISSN: 1526-5943

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Article

Hannes Köster and Matthias Pelster

The purpose of this paper is to analyze the impact of financial penalties on the stability of the banking sector.

Abstract

Purpose

The purpose of this paper is to analyze the impact of financial penalties on the stability of the banking sector.

Design/methodology/approach

A unique database of 671 financial penalties imposed on 68 international listed banks between 2007 and 2014 and a fixed-effects panel data approach were used.

Findings

The results show that financial penalties increase banks’ systemic risk exposure but do not significantly affect banks’ contribution to systemic risk. Additionally, the link between financial penalties and systemic risk exposure is weaker in regulatory and supervisory systems with more prompt corrective power among national authorities. By contrast, supervisory authorities’ stronger power to declare insolvency and a greater external monitoring culture exacerbate the positive effects of financial penalties on systemic risk exposure.

Practical implications

The punishment of misconduct should correct the social harm and prevent future misconduct while ensuring the banking system’s stability. Therefore, authorities should punish misconduct by implementing penalties against the financial institutions at a specific amount that offsets the damages of misconduct but does not threaten systemic stability. Penalties against institutions may be complemented by financial penalties against upper management to induce a more responsible culture in banks.

Originality/value

This paper is the first to study the effect of financial penalties on the stability of the financial system. The results contribute to the ongoing debate on the appropriateness of financial penalties and address the question of whether bank regulators reduce or contribute to banks’ systemic risk.

Details

The Journal of Risk Finance, vol. 19 no. 2
Type: Research Article
ISSN: 1526-5943

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Article

Yan Wang, Shoudong Chen and Xiu Zhang

The purpose of this paper is to measure a single financial institution's contribution to systemic risk by using extremal quantile regression and analyzing the influential…

Abstract

Purpose

The purpose of this paper is to measure a single financial institution's contribution to systemic risk by using extremal quantile regression and analyzing the influential factors of systemic risk.

Design/methodology/approach

Extreme value theory is applied when measuring the systemic risk of financial institutions. Extremal quantile regression, where extreme value distribution is assumed for the tail, is used to measure the extreme risk and analyze the changes in and dependencies of risk. Furthermore, influential factors of systemic risk are analyzed using panel regression.

Findings

The key findings of the paper are that value at risk and contribution to systemic risk are very different when measuring the risk of a financial institution; banks’ contributions to systemic risk are much higher; and size and leverage ratio are two significant and important factors influencing an institution's systemic risk.

Practical implications

Characterizing variables of financial institutions such as size, leverage ratio and market beta should be considered together when regulating and constraining financial institutions.

Originality/value

To take extreme risk into account, this paper measures systemic financial risk using extremal quantile regression for the first time.

Details

China Finance Review International, vol. 4 no. 4
Type: Research Article
ISSN: 2044-1398

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Book part

Shatha Qamhieh Hashem and Islam Abdeljawad

This chapter investigates the presence of a difference in the systemic risk level between Islamic and conventional banks in Bangladesh. The authors compare systemic

Abstract

This chapter investigates the presence of a difference in the systemic risk level between Islamic and conventional banks in Bangladesh. The authors compare systemic resilience of three types of banks: fully fledged Islamic banks, purely conventional banks (CB), and CB with Islamic windows. The authors use the market-based systemic risk measures of marginal expected shortfall and systemic risk to identify which type is more vulnerable to a systemic event. The authors also use ΔCoVaR to identify which type contributes more to a systemic event. Using a sample of observations on 27 publicly traded banks operating over the 2005–2014 period, the authors find that CB is the least resilient sector to a systemic event, and is the one that has the highest contribution to systemic risk during crisis times.

Details

Management of Islamic Finance: Principle, Practice, and Performance
Type: Book
ISBN: 978-1-78756-403-9

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Article

Mohamad Hassan and Evangelos Giouvris

The purpose of this paper is to examine the effects of bank mergers on systemic and systematic risks on the relative merits of product and market diversification…

Abstract

Purpose

The purpose of this paper is to examine the effects of bank mergers on systemic and systematic risks on the relative merits of product and market diversification strategies. It also observes determinants of M&A deals criteria, product and market diversification positioning, crisis threshold and other regulatory and market factors.

Design/methodology/approach

This research examines the impact and association between merger announcements and regulatory reforms at bank and system levels by investigating the impact of various bank consolidation strategies on firms’ risks. We estimate beta(s) as an index of financial institutions’ systematic risk. We then develop an index of the estimated equity value loss as the long-rum marginal expected shortfall (LRMES). LRMES contributes to compute systemic risk (SRISK) contribution of these firms, which is the capital that a firm is expected to need if we have another financial crisis.

Findings

Large acquiring banks decrease systemic risk contribution in cross-border M&As with a non-bank financial institution, and witness profitability (ROA) gains, supporting geographic diversification stability. Capital requirements, activity restrictions and bank concentration increase systemic risk contribution in national mergers. Bank mergers with investment FIs targets enhance productivity but impair technical efficiency, contrary to bank-real estate deals where technical efficiency change accompanied lower systemic risk contribution.

Practical implications

Financial institutions are recommended to avoid trapped capital and liquidity by efficiently using local balance sheet and strengthening them via implementing models that clearly set diversification and netting benefits to determine capital reserves and to drive capital efficiency through the clarity on product–activity–geography diversification and focus. This contributes to successful ringfencing, decreases compliance costs and maximises returns and minimises several risks including systemic risk.

Social implications

Policy implications: the adversative properties of bank mergers in respect of systemic risk require strict and innovative monitoring of bank mergers from the bidding level by both acquirers and targets and regulators and competition supervisory bodies. Moreover, emphasis on regulators/governments intervention and role, as it provides a stabilising factor of the markets and consecutively lower systemic risk even if the systematic idiosyncratic risk contribution was significant. However, such roles have to be well planned and scaled to avoid providing motives for banks to seek too-big-too-fail or too-big-to-discipline status.

Originality/value

This research contributes to the renewing regulatory debate on banks sustainable structures by examining the risk effect of bank diversification versus focus. The authors aim to address the multidimensional impacts and risks inherent to M&A deals, by examining the extent of the interconnectedness of M&A and its implications within and beyond the banking sector.

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Article

Trung Hai Le

The authors provide a comprehensive study on systemic risk of the banking sectors in the ASEAN-6 countries. In particular, they investigate the systemic risk dynamics and…

Abstract

Purpose

The authors provide a comprehensive study on systemic risk of the banking sectors in the ASEAN-6 countries. In particular, they investigate the systemic risk dynamics and determinants of 49 listed banks in the region over the 2000–2018 period.

Design/methodology/approach

The authors employ the market-based SRISK measure of Brownlees and Engle (2017) to investigate the systemic risk of the ASEAN-6's banking sectors.

Findings

The authors find that the regional systemic risk fluctuates significantly and currently at par or higher level than that of the recent global financial crisis. Systemic risk is generally associated with banks that have bigger size, more traditional business models, lower quality in their loan portfolios, less profitable and with lower market-to-book values. However, these relationships vary significantly between ASEAN countries.

Research limitations/implications

The research focuses on the systemic risk of ASEAN-6 countries. Therefore, the research results may lack generalizability to other countries.

Practical implications

The authors’ empirical evidence advocates the use of capital surcharges on the systemically important financial institutions. Although the region has been pushing to higher financial integration in recent years, the authors encourage the regional regulators to account for the idiosyncratic characteristics of their banking sectors in designing effective macroprudential policy to contain systemic risk.

Originality/value

This paper provides the first study on the systemic risk of the ASEAN-6 region. The empirical evidence on the drivers of systemic risk would be of interest to the regional regulators.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

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