Risk Assessment for Banking Systems
- 1 September 2006
- journal article
- Published by Institute for Operations Research and the Management Sciences (INFORMS) in Management Science
- Vol. 52 (9), 1301-1314
- https://doi.org/10.1287/mnsc.1060.0531
Abstract
We propose a new approach to assess systemic financial stability of a banking system using standard tools from modern risk management in combination with a network model of interbank loans. We apply our model to a unique data set of all Austrian banks. We find that correlation in banks' asset portfolios dominates contagion as the main source of systemic risk. Contagion is rare but can nonetheless wipe out a major part of the banking system. Low bankruptcy costs and an efficient crisis resolution policy are crucial to limit the systemwide impact of contagious default events. We compute the "value at risk" for a lender of last resort and find that the funds necessary to prevent contagion are surprisingly small.systemic risk, financial stability, risk management, interbank marketThis publication has 13 references indexed in Scilit:
- The Link between Default and Recovery Rates: Theory, Empirical Evidence, and Implications*The Journal of Business, 2005
- Cyclical correlations, credit contagion, and portfolio lossesJournal of Banking & Finance, 2004
- Interbank Exposures: Quantifying the Risk of ContagionJournal of Money, Credit and Banking, 2003
- Costs of banking system instability: Some empirical evidenceJournal of Banking & Finance, 2002
- Infectious defaultsQuantitative Finance, 2001
- Systemic Risk in Financial SystemsManagement Science, 2001
- A comparative analysis of current credit risk modelsJournal of Banking & Finance, 2000
- Entropy Optimization and Mathematical ProgrammingPublished by Springer Science and Business Media LLC ,1997
- Systemic risk in the netting systemJournal of Banking & Finance, 1996
- Bank contagion: A review of the theory and evidenceJournal of Financial Services Research, 1994