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Risk Assessment for Banking Systems. Capri, 25 th May 2006 Discussant: Simon Wolfe University of Southampton, UK. Be prepared for a crisis…. The next LTCM Credit derivatives exposures Rapid Growth of Private equity Where are the Early Warning Systems? What are our exposure levels?.
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Risk Assessment for Banking Systems Capri, 25th May 2006 Discussant: Simon Wolfe University of Southampton, UK.
Be prepared for a crisis… • The next LTCM • Credit derivatives exposures • Rapid Growth of Private equity • Where are the Early Warning Systems? • What are our exposure levels?
Target • The objective is to assess the risks facing a banking system. • Also to calculate the VaR for a Lender of Last Resort (LLR). • The main potential users of this approach are National Regulators as it requires access to proprietary data.
Strengths: • The paper presents a framework that combines standard risk measurement tools (i.e. CreditRisk+) to capture correlation in the banks’ exposures and a network model that captures interbank linkages. • Output highlights that correlated portfolio exposures are the main source of systemic risk (domino effects are rare events).
Contagious default events are mitigated by having an efficient crisis resolution policy and low bankruptcy costs. • LLR Funds necessary to prevent contagion are surprisingly small.
Grey areas and extensions • Interest rate risk (maturity approach) • Data on interbank exposures • Credit derivatives exposure • Operational Risk • Deposit Insurance fund? • Could this be compared with other models that use market data? • Finally, not for all?