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Title:Measuring systemic importance of financial institutions: An extreme value theory approach PDF Logo
Authors:Gravelle, Toni
Li, Fuchun
Issue Date:2011
Series/Report no.:Bank of Canada Working Paper 2011,19
Abstract:In this paper, we define a financial institution's contribution to financial systemic risk as the increase in financial systemic risk conditional on the crash of the financial institution. The higher the contribution is, the more systemically important is the institution for the system. Based on relevant but different measurements of systemic risk, we propose a set of market-based measures on the systemic importance of financial institutions, each designed to capture certain aspects of systemic risk. Multivariate extreme value theory approach is used to estimate these measures. Using six big Canadian banks as the proxy for Canadian banking sector, we apply these measures to identify systemically important banks in Canadian banking sector and major risk contributors from international financial institutions to Canadian banking sector. The empirical evidence reveals that (i) the top three banks, RBC Financial Group, TD Bank Financial Group, and Scotiabank are more systemically important than other banks, although with different order from different measures, while we also find that the size of a financial institution should not be considered as a proxy of systemic importance; (ii) compared to the European and Asian banks, the crashes of U.S. banks, on average, are the most damaging to the Canadian banking sector, while the risk contribution to the Canadian banking sector from Asian banks is quite lower than that from banks in U.S. and euro area; (iii) the risk contribution to the Canadian banking sector exhibits home bias, that is, cross-country risk contribution tends to be smaller than domestic risk contribution.
Subjects:Econometric and statistical methods
Financial Institutions
Financial stability
Financial system regulation and policies
JEL:C14
C58
G21
G32
Document Type:Working Paper
Appears in Collections:Bank of Canada Working Papers

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