Using Market Information for Banking System Risk Assessment

41 Pages Posted: 30 Aug 2005

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: August 22, 2005

Abstract

We propose a new method for the analysis of systemic stability of a banking system relying mostly on market data. We model both asset correlations and interlinkages from interbank borrowing so that our analysis gauges two major sources of systemic risk: Correlated exposures and mutual credit relations that may cause domino effects. We apply our method to a dataset of the 10 major UK banks and analyze insolvency risk over a one year horizon. We also suggest a stress testing procedure by analyzing the conditional asset return distribution that results from the hypothetical failure of individual institutions in this system. Rather than looking at individual bank defaults ceteris paribus, we take the change in the asset return distribution and the resulting change in the risk of all other banks into account. This takes previous stress tests of interlinkages a substantial step further.

Keywords: Systemic Risk, Financial Stability, Risk Management, Interbank Market

JEL Classification: G21, C15, C81, E44

Suggested Citation

Elsinger, Helmut and Lehar, Alfred and Summer, Martin, Using Market Information for Banking System Risk Assessment (August 22, 2005). Available at SSRN: https://ssrn.com/abstract=787929 or http://dx.doi.org/10.2139/ssrn.787929

Helmut Elsinger

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 (Contact Author)

Oesterreichische Nationalbank (OeNB) ( email )

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

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