Assessing the Contribution of Banks, Insurance and Other Financial Services to Systemic Risk
18 Pages Posted: 19 Jul 2013 Last revised: 4 Sep 2014
Date Written: March 13, 2014
The aim of this paper is to contribute to the debate on systemic risk by assessing the extent to which distress within the main different financial sectors, namely, the banking, insurance and other financial services industries contribute to systemic risk. To this end, we rely on the ∆CoVaR systemic risk measure introduced by Adrian and Brunnermeier (2011). In order to provide a formal ranking of the financial sectors with respect to their contribution to systemic risk, the original ∆CoVaR approach is extended here to include the Kolmogorov-Smirnov test developed by Abadie (2002), based on bootstrapping. Our empirical results reveal that in the Eurozone, for the period ranging from 2004 to 2012, the other financial services sector contributes relatively the most to systemic risk at times of distress affecting this sector. In turn, the banking sector appears to contribute more to systemic risk than the insurance sector. By contrast, the insurance industry is the most systemically risky financial sector in the United States for the same period, while the banking sector contributes the least to systemic risk in this area. Beyond this ranking, the three financial sectors of interest are found to contribute significantly to systemic risk, both in the Eurozone and in the United States.
Keywords: Systemic risk, CoVaR, Quantile regression, Stochastic dominance test
JEL Classification: C21, E44, G01, G20, G28
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