Identification of systemically important banks in India using SRISK

Juhi Gupta and Smita Kashiramka

Journal of Financial Regulation and Compliance, 2021, vol. 29, issue 4, 387-408

Abstract: Purpose - Systemic risk has been a cause of concern for the bank regulatory authorities worldwide since the global financial crisis. This study aims to identify systemically important banks (SIBs) in India by using SRISK to measure the expected capital shortfall of banks in a systemic event. The sample size comprises a balanced data set of 31 listed Indian commercial banks from 2006 to 2019. Design/methodology/approach - In this study, the authors have used SRISK to identify banks that have a maximum contribution to the systemic risk of the Indian banking sector. Leverage, size and long-run marginal expected shortfall (LRMES) are used to compute SRISK. Forward-looking LRMES is computed using the GJR-GARCH-dynamic conditional correlation methodology for early prediction of a bank’s contribution to systemic risk. Findings - This study finds that public sector banks are more vulnerable to macroeconomic shocks owing to their capital inadequacyvis-à-visthe private sector banks. This study also emphasizes that size should not be used as a standalone factor to assess the systemic importance of a bank. Originality/value - Systemic risk has attracted a lot of research interest; however, it is largely limited to the developed nations. This paper fills an important research gap in banking literature about the identification of SIBs in an emerging economy, India. As SRISK uses both balance sheet and market-based information, it can be used to complement the existing methodology used by the Reserve Bank of India to identify SIBs.

Keywords: India; Basel III; Banking; Bank regulation; Systemic risk; Risk-taking; SRISK; Systemically important banks; GJR-GARCH-DCC; B41; D81; E58; G01; G21 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eme:jfrcpp:jfrc-07-2020-0067

DOI: 10.1108/JFRC-07-2020-0067

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