Using Market Information for Banking System Risk Assessment

Helmut Elsinger, Alfred Lehar () and Martin Summer

International Journal of Central Banking, 2006, vol. 2, issue 1

Abstract: We propose a new method for the analysis of systemic stability of a banking system relying mostly on market data. We model both asset correlations and interlinkages from interbank borrowing so that our analysis gauges two major sources of systemic risk: correlated exposures and mutual credit relations that may cause domino effects of insolvencies. We apply our method to a data set of the ten major UK banks and analyze insolvency risk over a one-year horizon. We also suggest a stress-testing procedure by analyzing the conditional asset return distribution that results from the hypothetical failure of individual institutions in this system. Rather than looking at individual bank defaults ceteris paribus, we take the change in the asset return distribution and the resulting change in the risk of all other banks into account. This takes previous stress tests of interlinkages a substantial step further.

JEL-codes: C15 C81 E44 G21 (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (195)

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Related works:
Working Paper: Using Market Information for Banking System Risk Assessment (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2006:q:1:a:4

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