Measuring Capital at Risk in the Uk Banking Sector: A Microstructural Network Approach

68 Pages Posted: 8 Jun 2022

Date Written: May 27, 2022

Abstract

In this paper we construct and analyse the UK banking system’s Global Network of granular exposures which captures roughly 90% of the UK banking system’s total assets for the period 2018 Q1 to 2021 Q4. We thus study the microstructure of UK banking system focusing on the role played by concentration risk and interconnectedness across sectors. We then estimate the quarterly evolution of expected losses (Capital at Risk) for the UK banking sector, and via Monte Carlo simulations the stochastic distribution of UK banks’ losses to study the severity and likelihood of tail-events (Conditional Capital at Risk). In the end, we provide insights on the impact of the Covid-19 pandemic on UK banking system’s loss distribution by decomposing the sources of average and tail risks.

Keywords: Financial network, systemic risk, stress testing, Covid-19 pandemic

JEL Classification: D85, G21, G32, L14

Suggested Citation

Covi, Giovanni and Brookes, James and Raja, Charumathi, Measuring Capital at Risk in the Uk Banking Sector: A Microstructural Network Approach (May 27, 2022). Bank of England Working Paper No. 983, 2022, Available at SSRN: https://ssrn.com/abstract=4130513 or http://dx.doi.org/10.2139/ssrn.4130513

Giovanni Covi (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

James Brookes

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Charumathi Raja

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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