Systemic risk of European financial institutions: Estimation and ranking by the Marginal Expected Shortfall

Abdelkader Derbali and Slaheddine Hallara

Research in International Business and Finance, 2016, vol. 37, issue C, 113-134

Abstract: The task of processing systemic events and its negative externalities requires approaches to measure systemic risks and break it down into contributions of different institutions. The main objective of the present paper is to estimate the systemic risk of European banks following the financial crisis of 2007. To do so, we estimate the systemic risk of a sample composed of 281 financial institutions grouped in 16 European countries during the period from January 01, 2006 to December 31, 2012. We use the Marginal Expected Shortfall (MES) to measure systemic risk. The empirical results show that the systemic risk supported by European banks is very high. Moreover, the contribution of financial institutions in the risk of their system is very important as a result of the high correlation between institution returns and market returns. This correlation is measured by DECO-GARCH (1,1) introduced for the first time to assess systemic risk of financial institutions. This high level of systemic risk prompted the international authorities to intervene, as is the case of the countries of the Euro zone, where the International Monetary Fund, the European Central Bank and the World Bank intervened but did not lead to a permanent solution to limit the accumulation of systemic risk.

Keywords: Systemic risk; MES; European financial institutions; DECO-GARCH (search for similar items in EconPapers)
JEL-codes: D53 E02 E44 G21 G32 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:37:y:2016:i:c:p:113-134

DOI: 10.1016/j.ribaf.2015.10.013

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