This book provides a comprehensive methodology to measure systemic risk in many of its facets and dimensions based on state-of-the-art risk assessment methods. Systemic risk has gained attention in the public eye since the collapse of Lehman Brothers in 2008. The bankruptcy of the fourth-biggest bank in the USA raised questions whether banks that are allowed to become “too big to fail” and “too systemic to fail” should carry higher capital surcharges on their size and systemic importance. The Global Financial Crisis of 2008-2009 was followed by the Sovereign Debt Crisis in the euro area that saw the first Eurozone government de facto defaulting on its debt and prompted actions at international level to stem further domino and cascade effects to other Eurozone governments and banks. Against this backdrop, a careful measurement of systemic risk is of utmost importance for the new capital regulation to be successful and for sovereign risk to remain in check. Most importantly, the book introduces a number of systemic fragility indicators for banks and sovereigns that can help to assess systemic risk and the impact of macroprudential and microprudential policies.
Author(s): Deyan Radev
Series: Studies in Systems, Decision and Control, 409
Publisher: Springer
Year: 2022
Language: English
Pages: 93
City: Cham
Acknowledgements
Contents
List of Figures
List of Tables
1 Introduction
References
2 Related Literature
References
3 Multivariate Probabilities from Individual CDS Spreads
3.1 CDS Bootstrapping Procedure
3.2 Recovery of the Multivariate Probability Density
3.2.1 Solution of Minimum Cross Entropy
3.2.2 Proof of Independence Within the Joint Default Region of the CIMDO Distribution
References
4 Systemic Fragility Measures
4.1 Motivation
4.2 Probability Measures
4.2.1 Individual Probabilities
4.2.2 Systemic Fragility Measure
4.2.3 Probability of A Defaulting Given B Defaults
4.2.4 Probability of A Defaulting Given B and C Default
4.2.5 Probability of at Least N - 1 Additional Entities Defaulting Given Entity A Defaults
4.3 Data
4.4 Empirical Results
4.4.1 Marginal Probability of Default Results
4.4.2 Systemic Fragility Measure Results
4.4.3 Conditional Probabilities Results
4.5 Robustness Checks
4.6 Conclusion
References
5 Systemic Risk Contributions
5.1 Motivation
5.2 Conditional Joint Probability of Default
5.2.1 Definition
5.2.2 Estimation Procedure
5.3 Euro Area Sovereign Default Risk
5.3.1 Data and Descriptive Statistics
5.3.2 Marginal Probabilities of Default
5.3.3 Conditional Joint Probabilities of Default
5.3.4 Cascade Effects Among Euro Area Sovereigns
5.4 Sovereign Default and the European Union Banking System
5.4.1 Bank Data
5.4.2 Estimation Strategy
5.4.3 Spillover Effects from Sovereigns to Banks
5.5 Comparison with Common Probability Measures
5.5.1 Comparison with the Probability Measures by Segoviano and Goodhart (2009)
5.5.2 Comparison with Other Measures
5.6 Conclusion
References
6 Summary and Final Words
References
