Systemic Risk and the European Banking Sector

Nicola Borri, Marianna Caccavaio (), Giorgio Di Giorgio and Alberto Maria Sorrentino ()
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Marianna Caccavaio: LUISS Guido Carli University, Department of Economics and Finance and CASMEF
Alberto Maria Sorrentino: University of Rome Tor Vergata and CASMEF

No 1211, Working Papers CASMEF from Dipartimento di Economia e Finanza, LUISS Guido Carli

Abstract: Systemic risk is the risk of a collapse of the entire financial system, typically triggered by the default of one, or more, large and interconnected financial institutions. In this paper we estimate the systemic risk contribution of each financial institution in a large sample of European banks. We follow a recent methodology first proposed by Adrian and Brunnermeier (2011) based on the CoVaR and find that size is a predictor of a bank contribution to systemic risk, but it is not the only one. Leverage is important as well. Also, banks that have their headquarters in countries with a more concentrated banking system tend to contribute more to European wide systemic risk, even after controlling for their size. Therefore, any financial regulation designed only to curb banksÕ size would not completely eliminate systemic risk. On average, balance sheet variables are very weak predictors of banksÕ contribution to systemic risk, if compared to market based variables. Accounting rules provide enough degrees of freedom to make balance sheet less informative than market prices. As a result, measures of risk based on higher frequency market prices are more likely to anticipate systemic risk.

Keywords: Systemic Risk; SIFIs; European Banking System; CoVaR. (search for similar items in EconPapers)
JEL-codes: G01 G18 G21 G32 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-net and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:lui:casmef:1211

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