Does Market's Assessment of Systemically Important Banks Differ from Regulators' Rankings?

Abstract

This paper tests how closely the three leading market-based systemic risk measures (SRM) agree with the list of global systemically important banks (G-SIB) from the Financial Stability Board (FSB) and how closely they match the categorization of G-SIBs into the five systemic risk buckets used by the FSB to assign capital surcharges to G-SIBs. In addition, we investigate the concordance among these SRMs and with the FSB's designation methodology for G-SIBs. Finally, we test how these SRMs incorporate the information from high volatile events between 2015 to 2018. Our results show that alternative measures produce different estimates of systemic risk, systemically important banks and categories, with the SRISK ranking having the highest concordance with the FSB's classification of G-SIBs. In contrast, the three measures all promptly react to high volatile events.

Keywords: Systemic risk measure, Systemic risk ranking validation, Dominance test, Estimation Uncertainty, Concordance measure.

JEL Classification: C12, G01, G18, G20.