SAFE: An Early Warning System for Systemic Banking Risk

Posted: 4 Apr 2013 Last revised: 21 Apr 2013

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

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

Multiple version iconThere are 3 versions of this paper

Date Written: January 1, 2013

Abstract

This paper builds on existing microprudential and macroprudential early warning systems (EWSs) to develop a new, hybrid class of models for systemic risk that incorporates 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 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 Bianco, Timothy and Gramlich, Dieter and Ong, Stephen J., SAFE: An Early Warning System for Systemic Banking Risk (January 1, 2013). Journal of Banking & Finance, Available online 13 March 2013, ISSN 0378-4266. Available at SSRN: https://ssrn.com/abstract=2244593

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)

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

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