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Expected default based score for identifying systemically important banks

Yanzhen Yao, Jianping Li, Xiaoqian Zhu and Lu Wei

Economic Modelling, 2017, vol. 64, issue C, 589-600

Abstract: The issue of identifying systemically important banks has gained prominence since the recent global financial crisis in 2007. However, the extant methods either neglect the adverse impact on the financial system posed by a bank or ignore the various interactions among banks. To resolve this issue, the objective of this study is to put forward an expected default based score (EDBS) that overcomes the drawbacks of the existing methods from the perspective of contagion risk. This indicator measures the systemic importance of a bank by calculating the expected bank defaults triggered by its initial failure. In the empirical study, the expected default based score is applied to identify the systemically important banks in the Chinese banking system. Both the quantitative comparison with other major methods and the qualitative evaluation of the Delphi method validate the reliability of the EDBS method. The empirical results also demonstrate that interconnectedness among banks is an important and complementary driver of systemic importance in addition to asset size.

Keywords: Systemically important banks; Contagion risk; Systemic risk; Bank risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2017
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