Assessing systemic risk: An analysis of the German banking sector

Sophie-Dorothee Rotermund

No 129/2019, IPE Working Papers from Berlin School of Economics and Law, Institute for International Political Economy (IPE)

Abstract: This paper examines the impact of bank heterogeneity on the assessment of systemic risk in the context of the German banking sector. Precisely, it is questioned whether currently employed systemic risk indicators are able to account for banks' heterogeneity and to signal systemic risk reliably regardless of different bank types' individual characteristics. For the assessment, currently employed systemic risk indicators are applied to bank-type-specific data for six different bank types from 1990 until 2018 and benchmarked against crises that occurred during the assessment period. The findings suggest that these indicators are indeed able to account for the German banking sector's heterogeneity, providing insight into different bank types' behavior. Moreover, the indicators allow for the identification of individual bank types' role in the accumulation of systemic risk. Yet, they are only partially able to signal crises correctly and behave more like thermometers than barometers of risk. Structural features of the German banking sector amplify the risk of individual institutions and thus their contribution to systemic risk at large. The analysis further identifies three distinct episodes over the assessment period, finding evidence of intra-sectoral behavioral shifts across time. The distinctiveness of banks' behavior in these three episodes suggests that heterogeneity within the German banking system not only prevails between bank types but also across time. In sum, the research developed here, while fragmentary, illustrates the complexity of systemic risk developments in the German banking sector, which in turn proposes that these developments derive from multiple factors that vary over time. Further research into the causes and consequences of this heterogeneity is warranted.

Keywords: Banks; Banking; Bank heterogeneity; Germany; Systemic risk; Systemic riskindicators (search for similar items in EconPapers)
JEL-codes: G00 G21 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-ban and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ipewps:1292019

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