Risk Assessment for Banking Systems

Helmut Elsinger, Alfred Lehar () and Martin Summer

Management Science, 2006, vol. 52, issue 9, 1301-1314

Abstract: We propose a new approach to assess systemic financial stability of a banking system using standard tools from modern risk management in combination with a network model of interbank loans. We apply our model to a unique data set of all Austrian banks. We find that correlation in banks' asset portfolios dominates contagion as the main source of systemic risk. Contagion is rare but can nonetheless wipe out a major part of the banking system. Low bankruptcy costs and an efficient crisis resolution policy are crucial to limit the systemwide impact of contagious default events. We compute the "value at risk" for a lender of last resort and find that the funds necessary to prevent contagion are surprisingly small.

Keywords: systemic risk; financial stability; risk management; interbank market (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (334)

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http://dx.doi.org/10.1287/mnsc.1060.0531 (application/pdf)

Related works:
Working Paper: Risk Assessment for Banking Systems (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:52:y:2006:i:9:p:1301-1314

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