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Measuring Systemic Risk: A Risk Management Approach

37 Pages Posted: 26 Jul 2003 Last revised: 17 Mar 2011

Alfred Lehar

University of Calgary - Haskayne School of Business

Date Written: June 1, 2011

Abstract

This paper proposes a new method to measure and monitor the systemic risk in a banking system. Standard tools that regulators require banks to use for their internal risk management are applied at the level of the banking system to measure the risk of the regulator's portfolio. Using a sample of international banks from 1988 until 1999, I estimate correlations between bank asset portfolios and compute different measures of systemic risk. The portfolio aspect of the regulator's deposit insurance liability is explicitly considered and the methodology allows a comparison of sub-samples from different countries. Correlations, bank asset volatility, and bank capitalization increase for North American and somewhat for European banks, while Japanese banks face deteriorating capital levels and increasing volatility of their asset portfolios. In the sample period, the North American banking system gains stability while the Japanese banking sector becomes more fragile. The expected future liability of the regulator varies substantially over time and is especially high during the Asian crisis starting in 1997. Further analysis shows that the Japanese banks contribute most to the volatility of the regulator's liability at that time. Larger and more profitable banks have lower systemic risk and additional equity capital reduces systemic risk only for banks that are constrained by regulatory capital requirements.

Suggested Citation

Lehar, Alfred, Measuring Systemic Risk: A Risk Management Approach (June 1, 2011). EFA 2003 Annual Conference Paper No. 406. Available at SSRN: https://ssrn.com/abstract=423984 or http://dx.doi.org/10.2139/ssrn.423984

Alfred Lehar (Contact Author)

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada
403-220-4567 (Phone)

HOME PAGE: http://homepages.ucalgary.ca/~alehar/

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