This paper presents a portfolio-based framework for systemic risk in banking networks, highlighting diversification, institution-specific shocks, and contagion, emphasizing multi-pronged analytical methods for effective supervisory practices.
Framework for Systemic Risk Assessment
This paper introduces a portfolio-based framework designed to evaluate systemic risk in cross-border banking networks. Utilizing three complementary measures, it assesses distinct risk dimensions: diversification, institution-specific shocks, and contagion potential. Although there are limitations due to indirect exposures and the absence of bank-level bilateral data, this framework is crucial for surveillance. It helps identify jurisdictions that need enhanced supervisory attention.
Empirical Application and Findings
The empirical analysis reveals significant variations in systemic risk profiles across different banking systems. While diversification provides resilience in some cases, concentrated exposures can amplify vulnerabilities in others. These findings highlight the necessity of understanding how different factors contribute to systemic risk. By focusing on these variations, supervisory practices can be fine-tuned to address specific vulnerabilities in different banking environments.
Importance of Multi-Pronged Methods
The results emphasize the need for multi-pronged analytical approaches in supervisory practices. By employing various methods, it becomes easier to allocate monitoring resources effectively. This strategy ensures that emerging systemic vulnerabilities are targeted swiftly, helping to safeguard the overall stability of global banking systems. Through this approach, oversight can be more dynamic and responsive to potential risks.
