The Use of Systemic Risk Measures in the Indonesian Banking Sector

23 Pages Posted: 20 Jan 2016

See all articles by Arisyi Raz

Arisyi Raz

Birmingham Business School

Dhanita Ulfa

Bank Indonesia

Randy Cavendish

Bank Indonesia

Date Written: January 19, 2016

Abstract

2008 Global Financial Crisis has highlighted the importance of systemic risk, which had been overlooked prior to the crisis. Since then, systemic risk, which focuses on the risk contributions of financial institutions to the whole financial system, has become a necessary complement of idiosyncratic risk, which focuses on the individual risk of each financial institution, within the financial system surveillance framework. Since then, a number of systemic risk measures have been developed to quantify the risk contribution of financial institutions to the financial system. In this paper, we examine the applications of two systemic risk measures, namely Marginal Expected Shortfall (MES) and ∆CoVaR in large Indonesian banks throughout 2008-2015. We further extent our analysis by investigating the practical use of these systemic risk measures in predicting the crisis based on historical data. Our finding reveals that both systemic risk measures can be roughly rationalized in terms of bank-specific and country-specific of the banking sector. We also find that the use of MES is more appropriate compared to ∆CoVaR for systemic risk monitoring due to its relatively better ex-post losses predictability power.

Keywords: systemic risk, individual bank risk, financial crisis

JEL Classification: C23, G01, G21

Suggested Citation

Raz, Arisyi and Ulfa, Dhanita and Cavendish, Randy, The Use of Systemic Risk Measures in the Indonesian Banking Sector (January 19, 2016). 2016 Financial Markets and Corporate Governance. Available at SSRN: https://ssrn.com/abstract=2717963 or http://dx.doi.org/10.2139/ssrn.2717963

Arisyi Raz (Contact Author)

Birmingham Business School ( email )

Edgbaston Park Road
Birmingham, B15 2TY
United Kingdom

Dhanita Ulfa

Bank Indonesia ( email )

JL. M.H. Thamrin No. 2
Jakarta, 10350
Indonesia
622129814708 (Phone)
62213520766 (Fax)

Randy Cavendish

Bank Indonesia ( email )

JL. M.H. Thamrin No. 2
Jakarta, 10350
Indonesia

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