Does Systemic Risk in the Financial Sector Predict Future Economic Downturns?
City University of New York, CUNY Baruch College - Zicklin School of Business - Department of Economics and Finance
Turan G. Bali
Georgetown University - Robert Emmett McDonough School of Business
Fordham University - Gabelli School of Business
July 7, 2012
We derive a measure of aggregate systemic risk, designated CATFIN, that complements bank-specific systemic risk measures by forecasting macroeconomic downturns six months into the future using out-of-sample tests conducted with US, European and Asian bank data. Consistent with bank "specialness," the CATFIN of both large and small banks forecasts macroeconomic declines, whereas a similarly defined measure for both nonfinancial firms and simulated "fake banks" has no marginal predictive ability. High levels of systemic risk in the banking sector impact the macroeconomy through aggregate lending activity. A conditional asset pricing model shows that CATFIN is priced for financial and non-financial firms.
Number of Pages in PDF File: 85
Keywords: Systemic risk, value at risk, expected shortfall, financial crisis, banking crises, Too Big to Fail
JEL Classification: G01, G21, G12, C13, C22
Date posted: June 12, 2010 ; Last revised: July 7, 2012