Systemic Risk and Bank Failure
46 Pages Posted: 9 Sep 2014 Last revised: 29 Mar 2018
Date Written: March 1, 2018
This paper incorporates different measures of systemic risk in models of bank-failure prediction. We find that systemic risk is not a new phenomenon during the latest banking crisis, but its influence is stronger after 2005. The predictive power of systemic risk declines with predicting time interval. This finding suggests that, immediately before the failure, the influence of systemic risk seems to be largely channeled through and reflected in the worsening balance sheet. This finding helps reconcile the controversy over the role of systemic risk in bank failures. Finally, there is evidence that systemic risk weakens banks’ capital buffers.
Keywords: bank performance, bank failure, systemic risk, TED spread, LIBOR-OIS, distressed insurance premium (DIP), conditional value-at-risk (CoVAR), SRISK
JEL Classification: G21, G28, R10
Suggested Citation: Suggested Citation