Risk Assessment for Banking Systems
Austrian National Bank - Economic Studies Division
University of Calgary - Haskayne School of Business
Oesterreichische Nationalbank (OeNB)
14th Annual Utah Winter Finance Conference Paper; EFA 2003 Annual Conference Paper No. 437
We propose a new approach to assess the financial stability of an entire banking system using standard tools from modern risk management in combination with a network model of inter-bank loans. Rather than looking at banks individually, we analyze risk at the level of the banking system as a whole. We apply our model to a unique dataset of all Austrian banks. We find that correlation in banks' asset portfolios dominates contagion as the main source of systemic risk. Contagion occurs rarely but can wipe out a major part of the banking system. Low bankruptcy costs and an efficient crisis resolution policy are crucial to limit the system wide impact of contagious default events. We compute the "value at risk" for a lender of last resort and find the necessary funds to prevent contagion to be surprisingly small. More diversification in the inter-bank market does not necessarily reduce the risk of contagion.
Number of Pages in PDF File: 37
Keywords: Systemic Risk, Financial Stability, Risk Management, Inter-bank Market
JEL Classification: G21, C15, C81, E44working papers series
Date posted: August 25, 2004
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