Risk Exposures and Financial Spillovers in Tranquil and Crisis Times: Bank-Level Evidence
IMF Working Papers, June 5, 2013
Source details
- Canonical URL
- Risk Exposures and Financial Spillovers in Tranquil and Crisis Times: Bank-Level Evidence
Other formats
Bibliographic details
- Authors: Hélène Poirson, Jochen M. Schmittmann
- Published: June 5, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781484311240.001
Overview
- Sample: 83 financial institutions during 2003–2011.
- Central research questions:
- Evolution of banks’ stock price exposure to country-level and global risk factors as approximated by equity indices.
- Which bank-specific characteristics explain these risk exposures.
- Whether there are clusters of banks with equity price linkages beyond market risk factors.
Key findings
- Sensitivities to risk factors:
- Rise in sensitivities to both country and global risk factors in 2011, although on average to levels still below those of the subprime crisis.
- The average sensitivity to European risk has been steadily rising since 2008.
- Bank vulnerability characteristics:
- Banks reliant on wholesale funding are among the most vulnerable to shocks.
- Banks with weaker capital levels are more vulnerable.
- Banks with low valuations are more vulnerable.
- Banks with higher exposures to crisis countries are more vulnerable.
- Bank-to-bank linkages and spillovers:
- Analysis suggests any “globalization” of the euro area crisis is likely to be channelled through U.K. and U.S. banks.
- Little evidence of direct spillover effects to other regions.
Implications for monitoring and policy (derived from findings)
- Monitor banks’ exposures to country and global equity risk factors, with particular attention to trends since 2008 and spikes observed in 2011.
- Focus supervisory attention and stress-testing on banks that:
- Rely heavily on wholesale funding.
- Exhibit weaker capital levels.
- Have low market valuations.
- Have higher exposures to crisis countries.
- Recognize U.K. and U.S. banks as potential channels for broader transmission of euro area stress; consider cross-border coordination and targeted contagion mitigation measures involving these jurisdictions.
Source: Hélène Poirson and Jochen M. Schmittmann, "Risk Exposures and Financial Spillovers in Tranquil and Crisis Times: Bank-Level Evidence", June 5, 2013.