Systemic Risk in the Italian Banking Sector

18 Pages Posted: 30 Jan 2015

See all articles by Nicola Borri

Nicola Borri

LUISS University - Department of Economics and Finance

Giorgio Di Giorgio

Luiss Guido Carli University - Department of Economics and Finance

Marianna Caccavaio

Bank of Italy

Alberto Maria Sorrentino

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

Date Written: April 15, 2013

Abstract

Systemic risk is the risk of a collapse of the entire financial system, typically triggered by the default of one, or more, interconnected financial institutions. In this paper we estimate the systemic risk contribution of Italian listed banks for the period 2000-2011. We follow a methodology first proposed by Adrian and Brunnermeier (2011) and measure banks’ contribution to systemic risk by ΔCoVaR, that measures the contribution of bank i to the financial system VaR when bank i is in a state of distress. We define “the system” as the set of Italian listed banks in the sample. First, we find that the information contained in ΔCoVaR is different from that contained in the VaR. Therefore, regulators should take it into account in order to monitor the systemic risk posed by banks. Second, recent policy debate has focused on the danger posed by large banks and on the need to curb their size. We find that size is indeed the main predictor of a bank contribution to systemic risk. However, in the post-Lehman period leverage is also an important predictor of systemic risk. Consequently, any financial regulation designed only to curb banks’ size could not completely eliminate systemic risk because exactly in crisis times leverage becomes relevant. Hence, we conclude that ΔCoVaR is a very useful policy tool for regulators that can estimate which factors are more relevant in terms of contribution to systemic risk.

Keywords: Systemic Risk; SIFI; CoVaR

JEL Classification: G01; G18; G21; G32

Suggested Citation

Borri, Nicola and Di Giorgio, Giorgio and Caccavaio, Marianna and Sorrentino, Alberto, Systemic Risk in the Italian Banking Sector (April 15, 2013). Available at SSRN: https://ssrn.com/abstract=2557929 or http://dx.doi.org/10.2139/ssrn.2557929

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/

Giorgio Di Giorgio

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

Viale di Villa Massimo, 57
Rome, 00161
Italy

Marianna Caccavaio

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
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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