SAFE: An Early Warning System for Systemic Banking Risk

80 Pages Posted: 1 Nov 2011

See all articles by Mikhail V. Oet

Mikhail V. Oet

Case Western Reserve University - Weatherhead School of Management; Federal Reserve Banks - Federal Reserve Bank of Cleveland

Ryan Eiben

Indiana University

Timothy Bianco

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Dieter Gramlich

Baden-Wuerttemberg Cooperative State University Mosbach (DHBW)

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Jing Wang

Federal Reserve Banks - Federal Reserve Bank of Cleveland

Multiple version iconThere are 3 versions of this paper

Date Written: October 24, 2011

Abstract

This paper builds on existing microprudential and macroprudential early warning systems (EWSs) to develop a new, hybrid class of models for systemic risk, incorporating the structural characteristics of the financial system and a feedback amplification mechanism. The models explain financial stress using both public and proprietary supervisory data from systemically important institutions, regressing institutional imbalances using an optimal lag method. The Systemic Assessment of Financial Environment (SAFE) EWS monitors microprudential information from the largest bank holding companies to anticipate the buildup of macroeconomic stresses in the financial markets. To mitigate inherent uncertainty, SAFE develops a set of medium-term forecasting specifications that gives policymakers enough time to take ex-ante policy action and a set of short-term forecasting specifications for verification and adjustment of supervisory actions. This paper highlights the application of these models to stress testing, scenario analysis, and policy.

Keywords: Systemic risk, early warning system, financial stress index, microprudential, macroprudential, liquidity feedback

JEL Classification: G01, G21, G28, C22, C53

Suggested Citation

Oet, Mikhail V. and Eiben, Ryan and Bianco, Timothy and Gramlich, Dieter and Ong, Stephen J. and Wang, Jing, SAFE: An Early Warning System for Systemic Banking Risk (October 24, 2011). FRB of Cleveland Working Paper No. 11-29. Available at SSRN: https://ssrn.com/abstract=1952719

Mikhail V. Oet (Contact Author)

Case Western Reserve University - Weatherhead School of Management ( email )

364 PBL Building
Cleveland, OH 44106
United States

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States
216.774.2684 (Phone)
216.579.2932 (Fax)

Ryan Eiben

Indiana University ( email )

107 S Indiana Ave
100 South Woodlawn
Bloomington, IN 47405
United States

Timothy Bianco

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Dieter Gramlich

Baden-Wuerttemberg Cooperative State University Mosbach (DHBW) ( email )

Lohrtalweg 10
Mosbach, 74821
Germany

Stephen J. Ong

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

Jing Wang

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

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