Systemic Risk in Commercial Bank Lending

47 Pages Posted: 28 Feb 2014

See all articles by Daniel Roesch

Daniel Roesch

University of Regensburg

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Date Written: February 27, 2014

Abstract

This paper develops a bank model for financial systemic risk in bank lending. The model analyzes the impact of a financial institution failure on the distribution of losses in the financial system. The fundamental idea is that bank loss rates may be decomposed into a level, momentum, systematic and systemic component. Financial institutions fail when unexpected losses exceed the capital buffer and the release of capital allocated to credits. Failed financial institutions pass these loss exceedances on to creditors, deposit insurance schemes or the general public. The benefits of the presented model framework are (i) the identification of systemically relevant financial institutions, and (ii) the measurement of the size of safety nets in terms of attachment likelihood and expected losses given attachment. The model is generally applicable as it does not rely on financial market data. The empirical evidence presented is based on information collected by US prudential regulators from 1997 to 2012. The parameter estimation is based on a novel maximum likelihood technique to derive the parameters in a non-linear mixed model with multiple random effects.

Keywords: Asset correlation; Bank capital buffer; Basel Committee on Banking Supervision; Credit portfolio risk; Commercial banks; Regulation; Systemic risk.

JEL Classification: G20; G28; C51

Suggested Citation

Roesch, Daniel and Scheule, Harald, Systemic Risk in Commercial Bank Lending (February 27, 2014). Available at SSRN: https://ssrn.com/abstract=2402063 or http://dx.doi.org/10.2139/ssrn.2402063

Daniel Roesch

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

Harald Scheule (Contact Author)

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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