Systemic Risk in the European Banking Sector

19 Pages Posted: 19 Jul 2012 Last revised: 20 Jul 2012

See all articles by Nicola Borri

Nicola Borri

LUISS University - Department of Economics and Finance

Marianna Caccavaio

Bank of Italy

Giorgio Di Giorgio

Luiss Guido Carli University - Department of Economics and Finance

Alberto Maria Sorrentino

University of Rome II - Faculty of Economics ; LUISS University - Faculty of Economics and Finance

Date Written: July 19, 2012

Abstract

Systemic risk is the risk of a collapse of the entire financial system, typically triggered by the default of one, or more, large and interconnected financial institutions. In this paper we estimate the systemic risk contribution of each financial institution in a large sample of European banks. We follow a recent methodology first proposed by Adrian and Brunnermeier (2011) based on the CoVaR and find that size is a predictor of a bank contribution to systemic risk, but it is not the only one. Leverage is important as well. Also, banks that have their headquarters in countries with a more concentrated banking system tend to contribute more to European wide systemic risk, even after controlling for their size. Therefore, any financial regulation designed only to curb banks’ size would not completely eliminate systemic risk. On average, balance sheet variables are very weak predictors of banks’ contribution to systemic risk, if compared to market based variables. Accounting rules provide enough degrees of freedom to make balance sheet less informative than market prices. As a result, measures of risk based on higher frequency market prices are more likely to anticipate systemic risk.

Keywords: systemic risk, SIFIs, European Banking System, CoVaR

JEL Classification: G01, G18, G21, G32

Suggested Citation

Borri, Nicola and Caccavaio, Marianna and Di Giorgio, Giorgio and Sorrentino, Alberto, Systemic Risk in the European Banking Sector (July 19, 2012). Available at SSRN: https://ssrn.com/abstract=2112919 or http://dx.doi.org/10.2139/ssrn.2112919

Nicola Borri (Contact Author)

LUISS University - Department of Economics and Finance ( email )

viale Romania, 32
Rome, 00197
Italy

HOME PAGE: http://docenti.luiss.it/borri/

Marianna Caccavaio

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giorgio Di Giorgio

Luiss Guido Carli University - Department of Economics and Finance ( email )

Viale di Villa Massimo, 57
Rome, 00161
Italy

Alberto Sorrentino

University of Rome II - Faculty of Economics ( email )

Via Columbia n.2
Rome, Rome 00100
Italy

LUISS University - Faculty of Economics and Finance ( email )

Viale Romania 32
Rome, 00197
Italy

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