SAFE: An early warning system for systemic banking risk

Mikhail Oet, Timothy Bianco, Dieter Gramlich and Stephen J. Ong

Journal of Banking & Finance, 2013, vol. 37, issue 11, 4510-4533

Abstract: This paper builds on existing microprudential and macroprudential early warning systems (EWSs) to develop a new, hybrid class of models for systemic risk that incorporates the structural characteristics of the financial system and a feedback amplification mechanism. The models explain financial stress using both public and proprietary supervisory data from systemically important institutions, regressing institutional imbalances using an optimal lag method. The Systemic Assessment of Financial Environment (SAFE) EWS monitors microprudential information from the largest bank holding companies to anticipate the buildup of macroeconomic stresses in the financial markets. To mitigate inherent uncertainty, SAFE develops a set of medium-term forecasting specifications that gives policymakers enough time to take ex-ante policy action and a set of short-term forecasting specifications for verification and adjustment of supervisory actions. This paper highlights the application of these models to stress testing and policy.

Keywords: Systemic risk; Early warning system; Financial stress index; Microprudential; Macroprudential; Liquidity feedback (search for similar items in EconPapers)
JEL-codes: C22 C53 G01 G21 G28 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (29)

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Working Paper: SAFE: An early warning system for systemic banking risk (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:11:p:4510-4533

DOI: 10.1016/j.jbankfin.2013.02.016

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