Short-Term Wholesale Funding and Systemic Risk; A Global Covar Approach
In this paper we identify some of the main factors behind systemic risk in a set of international large-scale complex banks using the novel CoVaR approach. We find that short-term wholesale funding is a key determinant in triggering systemic risk episodes. In contrast, we find no evidence that a larger size increases systemic risk within the class of large global banks. We also show that the sensitivity of system-wide risk to an individual bank is asymmetric across episodes of positive and negative asset returns. Since short-term wholesale funding emerges as the most relevant systemic factor, our results support the Basel Committee's proposal to introduce a net stable funding ratio, penalizing excessive exposure to liquidity risk.
Year of publication: |
2012-02-01
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Institutions: | International Monetary Fund (IMF) ; International Monetary Fund |
Subject: | Economic models | Financial institutions | Financial risk | International banks | systemic risk | recapitalization | financial system | contagion | financial crisis | financial stability | bond | stock market | pre-crisis | bonds | financial contagion | financial markets | financial distress | financial intermediation | global financial crisis | corporate bond | money market | government bond | bank liquidity | government bonds | financial instruments | banking supervision | financial assets | stock index | bond yield | crisis episodes | international financial system | financial intermediaries | financial sector | corporate bonds | financial fragility | benchmark bond | stock returns | treasury bond | money market mutual funds |
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