Monitoring Systemic Risk Basedon Dynamic Thresholds

Author/Editor:

Kasper Lund-Jensen

Publication Date:

June 1, 2012

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Successful implementation of macroprudential policy is contingent on the ability to identify and estimate systemic risk in real time. In this paper, systemic risk is defined as the conditional probability of a systemic banking crisis and this conditional probability is modeled in a fixed effect binary response model framework. The model structure is dynamic and is designed for monitoring as the systemic risk forecasts only depend on data that are available in real time. Several risk factors are identified and it is hereby shown that the level of systemic risk contains a predictable component which varies through time. Furthermore, it is shown how the systemic risk forecasts map into crisis signals and how policy thresholds are derived in this framework. Finally, in an out-of-sample exercise, it is shown that the systemic risk estimates provided reliable early warning signals ahead of the recent financial crisis for several economies.

Series:

Working Paper No. 12/159

Subject:

English

Publication Date:

June 1, 2012

ISBN/ISSN:

9781475504576/1018-5941

Stock No:

WPIEA2012159

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

36

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