Measuring Systemic Risk on Indonesia’s Banking System

Alfan Mansur

MPRA Paper from University Library of Munich, Germany

Abstract: Inter-connectedness is one important aspect of measuring the degree of systemic risk arising in the banking system. In this paper, this aspect together with the degree of commonality and volatility are measured using Principal Component Analysis (PCA), dynamic Granger causality tests and a Markov regime switching model. These measures can be used as leading indicators to detect pressures in the financial system, in particular, the banking system. There is evidence that the inter-connectedness level together with a degree of commonality and volatility among banks escalate substantially during the financial distress. It implies that less systemically important banks could become more important in the financial system during abnormal times. Therefore, the list of systemically important banks regulated in the Law on Prevention and Mitigation of Financial System Crisis (UU PPKSK) should be updated more frequently during the period of financial distress.

Keywords: Inter-connectedness; systemic risk; Principal Component Analysis; Granger causality; regime switching. (search for similar items in EconPapers)
JEL-codes: C32 C38 G21 (search for similar items in EconPapers)
Date: 2018-01-19, Revised 2018-04-12
New Economics Papers: this item is included in nep-ban, nep-ore, nep-rmg and nep-sea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Published in Kajian Ekonomi dan Keuangan 2.2(2018): pp. 94-105

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:93300

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