Journal of Credit Risk

Three ways to improve the systemic risk analysis of the Central and Eastern European region using SRISK and CoVaR

Marta Karaś and Witold Szczepaniak

  • The paper presents three modifications to measures of systemic risk – SRISK and ΔCoVaR – and increases the number of analyzed systemically important institutions in the CEE region. The study is more comprehensive than its predecessors with respect to the region.
  • Presented methodology integrates the information about banks' systemicness, interconnectedness, complexity, significance and size. Additionally, we include the data of broad domestic market indexes into the calculation of ΔCoVaR. The new methodology takes into account endogenous systemic risk factors, both at the bank level and the system level, as well as exogenous factors such as the exchange rate or the impact of the biggest European stock markets.
  • The empirical results confirm increased systemic risk for CEE countries in two periods, 2008–2009 and 2011–2013, at the same time identifying countries more prone to fragility and to contagion. The rankings confirm the high potential cost of systemic risk materialization in Central and Eastern Europe. We also show that in some cases, this burden was greater for small CEE countries than it was for Germany that has, by far, the biggest value of systemic risk.
  • The study confirms that systemic risk in the CEE region has the same theoretical properties as it does for advanced economies. The results also show that during periods of calm, SRISK and CoVaR indicate different financial institutions as the weakest links in the given financial system. These results have a macroprudential consequence: the regulatory bodies in the analyzed countries should consider both the information provided by CoVaR and by SRISK when monitoring systemic risk, especially when they want to put banks under scrutiny.

This paper proposes three modifications to the calculation of SRISK and CoVaR. These modifications make it possible to apply the two measures to an additional 31 systemically important financial institutions in the Central and Eastern European (CEE) region. They also add information about interconnectedness and complexity, and illuminate risk factors that are endemic to CEE and Western European stock markets. We empirically analyze Bulgaria, Estonia, Czechia, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia in the period from 2006 to 2018. The results confirm increased systemic risk in the years 2008–9 and 2012–13. Systemic risk rankings demonstrate the significant scale of systemic risk relative to gross domestic product for many of the countries under analysis. The results also confirm that systemic risk in the CEE region has the same theoretical properties as it does in advanced economies. This finding underlines that it is necessary to analyze the CEE region using measures of systemic risk that are at least as sophisticated as those used in the most developed countries.

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