Risk Assessment for Banking Systems

37 Pages Posted: 25 Aug 2004

See all articles by Helmut Elsinger

Helmut Elsinger

Austrian National Bank - Economic Studies Division

Alfred Lehar

University of Calgary - Haskayne School of Business

Martin Summer

Oesterreichische Nationalbank (OeNB)

Date Written: January 2003

Abstract

We propose a new approach to assess the financial stability of an entire banking system using standard tools from modern risk management in combination with a network model of inter-bank loans. Rather than looking at banks individually, we analyze risk at the level of the banking system as a whole. We apply our model to a unique dataset of all Austrian banks. We find that correlation in banks' asset portfolios dominates contagion as the main source of systemic risk. Contagion occurs rarely but can wipe out a major part of the banking system. Low bankruptcy costs and an efficient crisis resolution policy are crucial to limit the system wide impact of contagious default events. We compute the "value at risk" for a lender of last resort and find the necessary funds to prevent contagion to be surprisingly small. More diversification in the inter-bank market does not necessarily reduce the risk of contagion.

Keywords: Systemic Risk, Financial Stability, Risk Management, Inter-bank Market

JEL Classification: G21, C15, C81, E44

Suggested Citation

Elsinger, Helmut and Lehar, Alfred and Summer, Martin, Risk Assessment for Banking Systems (January 2003). 14th Annual Utah Winter Finance Conference Paper; EFA 2003 Annual Conference Paper No. 437. Available at SSRN: https://ssrn.com/abstract=423985 or http://dx.doi.org/10.2139/ssrn.423985

Helmut Elsinger (Contact Author)

Austrian National Bank - Economic Studies Division ( email )

POB 61
Vienna, A-1011
Austria

Alfred Lehar

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/

Martin Summer

Oesterreichische Nationalbank (OeNB) ( email )

Otto-Wagner-Platz 3, PO Box 61
Vienna,
1010 Vienna, A-1011
Austria

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