A Quantitative Evaluation of Systemic Risk in the European Banking Sector

Abstract

This paper proposes a cross-section analysis of systemic risk in the European banking sector. The absence of a general definition of systemic risk makes it difficult to use a single, practically relevant model. Therefore, we empirically compare four methods of measuring systemic risk, namely Value-at-Risk (VaR), Marginal Expected Shortfall (MES), Systemic Risk Index (SRISK), and DCoVaR. We use a sample of 69 listed European banks over the period 2005–2019. The renewal of financial supervision following the global financial crisis was a consequence of the unveiled shortcomings in the regulation and monitoring of systemic risk, along with a greater focus on the ‘too big to fail’ institutions. We find that this thesis different risk measures seem to be good indicators of the aggregate systemic risk in the financial system, all reacting to major real events. We pool systemic risk rankings of the European banks prior to the global financial crisis, the European debt crisis, and per today. The differences in underlying inputs reflect the mixed outcome on an individual level. We cannot identify a leading indicator. However, SRISK privileges size and leverage which are the main components to be considered when examining systemically important banks. The empirical application verifies the ability of SRISK to identify the banks that contributes the most to the overall systemic risk, labeled as G-SIB by the Financial Stability Board.