What Is Systemic Risk?

The traditional view of risk in a financial system is that it is the summation of individual risks within the system. However, the financial crisis that started in 2007 has driven home that this view of risk is inadequate. It is the interactions of financial institutions and markets that determine the systemic risks that drive financial crises. We identify four types of systemic risk. These are (i) panics—banking crises due to multiple equilibria; (ii) banking crises due to asset price falls; (iii) contagion; and (iv) foreign exchange mismatches in the banking system.     

Does financial connectedness predict crises?

The global financial crisis has reignited interest in models of crisis prediction. It has also raised the question whether financial interconnectedness—a possible source of systemic risk—can serve as an early warning indicator of crises. In this paper, we examine the ability of connectedness in the global network of financial linkages to predict systemic banking crises during the 1978–2010 period. Our results indicate that increases in a country’s own connectedness and decreases in its neighbours’ connectedness are associated with a higher probability of banking crises after controlling for macroeconomic fundamentals. Our findings suggest that financial interconnectedness has early warning potential, especially for the 2007–2010 wave of systemic banking crises.     

宏观审慎政策协调能否抑制国际性银行危机传染？——基于跨境金融关联视角的实证研究

本文基于跨境金融关联视角对宏观审慎政策能否抑制国际性银行危机传染这一重要的理论与实践问题进行了实证研究。选取亚洲金融危机和全球金融危机时期遭受冲击的10个代表性国家作为样本,构建Logit模型和多元回归模型探讨本国及具有金融关联的国家协调实施宏观审慎政策对本国系统性银行危机传染的影响。研究表明,具有金融关联的国家出现金融危机会显著增加本国系统性银行危机的发生概率,具有金融关联的国家实施宏观审慎政策对本国信贷的影响比对房价的影响更明显,本国及具有金融关联的国家协调实施宏观审慎政策会显著降低本国系统性银行危机的发生概率。在调整银行危机指标及考虑贸易关联和流动性风险的影响后,研究结果依然保持稳健。本文的研究结论揭示了加强宏观审慎政策协调有助于维护全球金融稳定,对于中国政策当局强化宏观审慎管理具有极其重要的政策含义。     

利率市场化背景下银行系统性危机的实证研究

从利率市场化的国际经验来看,无论是在发达国家还是发展中国家,其实施过程都容易导致不同程度的银行业危机。采用1973~2012年42个国家的面板数据,对利率市场化背景下的银行业危机进行的实证研究表明：利率市场化的推进将增加银行系统性危机发生的机率,特别是在存款利率市场化阶段,而严格的银行监管是抑制银行系统危机发生的有效方法;显性存款保险制度的设立无助于利率市场化后银行系统性风险的防范,甚至有可能会增加危机发生的机率;资本账户开放下进行利率市场化会增加银行系统危机发生的机率。利率市场化进程中允许开设民营银行不会增加银行系统危机的发生机率。     

Financial liberalization,insurance market,and the likelihood of financial crises

This paper provides empirical evidence to investigate the direct impact of financial liberalization on the likelihood of currency/systemic banking crises, and examines the roles of insurance market, country risk, and economic conditional variables on the relationship between financial liberalization and financial crises in 39 countries. Our empirical results support that financial liberalization does have a significantly negative impact on the likelihood of currency/systemic banking crises, and that the indirect effects of insurance development and lower country risk decrease the probability of crises, but the indirect effect of economic conditional proxies is enhanced with the likelihood of a financial crisis. The policy implication is that the government or authority should strengthen the positive role of the insurance sector in order to combat financial crises.     

How do bank competition,regulation, and institutions shape the real effect of banking crises? International evidence

This paper studies the influence of bank competition on the real effect of 36 systemic banking crises in 30 countries over the 1980–2000 period and how this influence varies across countries depending on bank regulation and institutions. We find that bank market power is not on average useful for mitigating the negative real effect of a systemic banking crisis. Market power promotes higher growth during normal times in industries that are more dependent on external finance but induces a bigger reduction in growth during systemic banking crises. We also find a country-specific effect depending on bank regulation and institutions. Stringent capital requirements and poor protection of creditor rights increase the benefits of bank market power for mitigating the negative real effect of a systemic banking crisis because bank market power has a positive effect on economic growth during both crisis and non-crisis periods in these environments.     

How credible is a too-big-to-fail policy? International evidence from market discipline

This paper analyzes in an international sample of banks from 104 countries if the sensitivity of the cost of deposits to bank risk varies across banks depending on their systemic and absolute size. We analyze a period before the 2007 financial crisis and control for endogeneity of bank size, intervention policies in past banking crises, and soundness of countries’ public finances. Our results are consistent with the predominance of the too-big-to-fail hypothesis, although this effect is stronger in countries that did not impose losses on depositors in past banking crises and in countries with sounder public finances.     

Contagion and banking crisis – International evidence for 2007–2009

Policy makers aim to avoid banking crises, and although they can to some extent control domestic conditions, internationally transmitted crises are difficult to tackle. This paper identifies international contagion in banking during the 2007–2009 crisis for 54 economies. We identify three channels of contagion – systematic, idiosyncratic and volatility – and find evidence for these in 45 countries. Banking crises are overwhelmingly associated with the presence of both systematic and idiosyncratic contagion. The results reveal that crisis shocks transmitted from a foreign jurisdiction via idiosyncratic contagion increase the likelihood of a systemic crisis in the domestic banking system by almost 37 percent, whereas increased exposure via systematic contagion does not necessarily destabilize the domestic banking system. Thus while policy makers and regulatory authorities are rightly concerned with the systematic transmission of banking crises, reducing the potential for idiosyncratic contagion can importantly reduce the consequences for the domestic economy.     

The size of banking crises in credible fixed exchange rate regimes

Since monetary policy is constrained in fixed exchange rate regimes, we should observe fewer banking crises due to moral hazard in countries with credible currency pegs. However, three countries with seemingly credible pegs in the nineteen-eighties and -nineties, namely China, Hong Kong and Argentina, still suffered crises in their domestic banking sectors. The present note illustrates that bank incentives to take on excess risk still exist in countries with currency peg credibility and that the size of that risk exposure (and thus the potential for crisis) may be positively related to the level of central bank foreign exchange reserves.     

Determinants of risk in the banking sector during the European Financial Crisis

Risk assessment in the banking sector has been a prominent topic in the banking literature and has gained attention especially since the recent financial crises. In particular, the European crisis, which was the first since the formation of the Eurozone, underlined a number of significant problems and increased concerns on the tail or crash risk of banks. In the present study, we seek to examine whether information asymmetry, the importance of banks in the financial system and systemic risk play significant roles in the evolution of stock crashes in the banking sector. Information asymmetry is proxied by opacity, the importance of a bank in a financial network is proxied by network centrality, and systemic risk is proxied by clustering. The research framework considers a number of regulatory, reporting and financial market factors that have also been determined to relate to stock crashes and shows that all of the above factors are related to (idiosyncratic) stock crash risk under specific conditions.     

Crises and confidence: Systemic banking crises and depositor behavior

We show that individuals who have experienced a systemic banking crisis are 11 percentage points less likely to use banks in the U.S. than otherwise similar individuals who emigrated from the same country but did not live through a crisis. This finding is robust to controlling for exposure to other macroeconomic events and to various methods for addressing potential bias due to migrant self-selection. Consistent with the view that personal experience plays an important role in decision-making, the effects are larger for individuals who were older and more likely to have had wealth entrusted to the banking system at the time of the crisis and for people who experienced crises in countries without deposit insurance.     

Macroeconomic adjustment and the history of crises in open economies

This paper investigates the impact of the history of crises on macroeconomic performance. We first study the impact of past banking crises on the probability of a future banking crisis. We do not detect a learning process from past banking crises. Countries that have already experienced one banking crisis generally have a higher likelihood of experiencing another crisis; and the depth of the crisis does not appear to be affected by the previous historical experience with crisis events. Evidence also suggests that, in middle-income countries, higher de jure capital account openness is associated with lower likelihood of a banking crisis, a lower ratio of non-performing loans during the crisis, and higher levels of forgone output in the crisis' aftermath. In contrast, we find that past crisis experience has a significant impact on savings. When facing considerable political risk, the past does seem to matter – countries with more people who were exposed, over their lifetime, to larger disasters will tend to save more. This association, however, does not hold for countries with more stable political systems.     

Early warning systems and systemic banking crises in low income countries: A multinomial logit approach

This paper estimates an early warning system (EWS) for predicting systemic banking crises in a sample of low income countries in Sub-Saharan Africa. Since the average duration of crises in this sample of countries is longer than one year, the predictive performance of standard binomial logit models is likely to be hampered by the so-called crisis duration bias. The bias arises from the decision to either treat crisis years after the onset of a crisis as non-crisis years or remove them altogether from the model. To overcome this potential drawback, we propose a multinomial logit approach, which is shown to improve the predictive power of our EWS compared to the binomial logit model. Our results suggest that crisis events in low income countries are associated with low economic growth, drying up of banking system liquidity and widening of foreign exchange net open positions.     

Anatomy of banking crises in developing and emerging market countries

This paper uses a Binary Classification Tree (BCT) model to analyze banking crises in 50 emerging market and developing countries during 1990-2005. The BCT model identifies three conditions (and the specific threshold of the key indictors) at which the vulnerability to banking crisis increases—(i) very high inflation, (ii) highly dollarized bank deposits combined with nominal depreciation or low bank liquidity, and (iii) low bank profitability—which highlight that foreign currency risk, poor financial soundness, and macroeconomic instability are important drivers of banking crises. The results also emphasize the importance of conditional thresholds in triggering crises, in that banking crises are underlined by a combination of vulnerabilities—or a sequence of (non-linear) conditions—rather than the deterioration of a unique factor.     

Fiscal sustainability in the presence of systemic banks: the case of EU countries

We provide a first attempt to include an off-balance sheet, implicit insurance to SIFIs into a consistent assessment of fiscal sustainability, for 27 countries of the European Union. We first calculate tax gaps à la Blanchard (OECD Economics Department Working Papers, No 79, 1990) and Blanchard et al. (Revue économique de l’OCDE, 1990). We then introduce two alternative measures of implicit off-balance sheet liabilities related to the risk of a systemic bank crisis. The first one relies on microeconomic data at the bank level. The second one is based on econometric estimations of the probability and the cost of a systemic banking crisis. The former approach provides an upper evaluation of the fiscal cost of systemic banking crises, whereas the latter one provides a lower one. Hence, we believe that the combined use of these two methodologies helps to gauge the range of fiscal risk.     

Bank systemic risk and corporate investment: Evidence from the US

In this paper, we develop a simple two-period model in which a bank’s investment (e.g., loans) is influenced by short-term financing and a probability of a financial crisis. When banks ex ante expect to be bailed out during financial crises, they do not necessarily internalize the cost of financial crises and invest more. We argue that the level of systemic risk in the banking sector is largely driven by (1) the way in which banks finance their investment (e.g., loans) using more short-term debt and/or (2) the increase in asset commonality amongst banks. We use three measures that arguably capture two dimensions of “bank systemic risk”, namely, (1) bank funding maturity and (2) bank asset commonality, to empirically test whether bank systemic risk has a positive effect on corporate investment. We document that in a sample of publicly listed firms in the United States over the period 1991–2013, bank systemic risk is positively associated with the firm-level investment ratio after controlling for a large set of country- and firm-level variables. In addition, we show that a firm's leverage strengthens the positive effect of bank systemic risk on corporate investment, suggesting that more financially constrained firms experience a larger effect of bank systemic risk on corporate investment than less financially constrained firms.     

US government TARP bailout and bank lottery behavior

Considerable debate surrounds how the US government's TARP bailout intervention has affected the risk-taking and moral hazard behavior of U.S. banks around the global financial crisis. We examine this issue with a focus on lottery behavior introducing MAX/MIN as a new measure of lotteryness in banking to capture the loss protection from bank bailout guarantees. We find that the TARP bailout increased the likelihood of bank lotteryness and risk shifting. Lottery-like bank equities are riskier after TARP and exhibit fatter right to left tails. A consistent pattern of risk taking and lottery behavior extends both before and after the 2008–2009 crisis, engulfing the largest systemic banks (SIFIs). While confirming that lottery-like bank equities have lower short-term return, we find they exhibit better cumulative long-term return performance. Our findings have important policy implications regarding government intervention in banking crises.     

The real effect of banking crises: Finance or asset allocation effects? Some international evidence

This paper analyzes whether the decline in economic growth that follows a banking crisis occurs because of a reduction in the amount of credit available (finance effect) or a worsening in the allocation of investable resources (asset allocation effect). We use a sample of more than 2500 industrial firms in 18 developed and developing countries that experienced 19 systemic banking crises between 1989 and 2007. The results indicate that banking crises negatively affect firms’ intangible investments, which intensifies the economic downturn. The negative growth effect produced by the worsening of the investment allocation is stronger in countries with highly developed financial systems and institutions.     

Fund Management and Systemic Risk – Lessons from the Global Financial Crisis

Fund managers play an important role in increasing efficiency and stability in financial markets. But research also indicates that fund management in certain circumstances may contribute to the buildup of systemic risk and severity of financial crises. The global financial crisis provided a number of new experiences on the contribution of fund managers to systemic risk. In this article, we focus on these lessons from the crisis. We distinguish between three sources of systemic risk in the financial system that may arise from fund management: insufficient credit risk transfer to fund managers; runs on funds that cause sudden reductions in funding to banks and other financial entities; and contagion through business ties between fund managers and their sponsors. Our discussion relates to the current intense debate on the role the so‐called shadow banking system played in the global financial crisis. Several regulatory initiatives have been launched or suggested to reduce the systemic risk arising from non‐bank financial entities, and we briefly discuss the likely impact of these on the sources of systemic risk outlined in the article.     

Banking industry volatility and banking crises

While studies using balance sheet information of banks and macroeconomic indicators to forecast banking crises are prolific, empirical research using market information of banks is relatively sparse. We investigate whether banking industry volatility, constructed with the disaggregated approach from Campbell et al. [Campbell, J.Y., Lettau, M., Malkiel, B.G., Xu, Y., 2001. Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk? The Journal of Finance 56, 1–43] using exclusively publicly available market information of banks, is a good predictor of systemic banking crises in the analyses including data from 18 developed and 18 emerging markets. We find that banking industry volatility performs well in predicting systemic banking crises for developed markets but very poor for emerging markets, which suggest that the impact of market forces on the soundness of the banking system might be different for developed and emerging markets. We also find that those macroeconomic and banking risk management indicators have different impact on the probability of banking crises. Therefore, the traditional cross-country results of the studies on banking crises need to be interpreted cautiously.