Interconnectedness of Global Systemically-Important Banks and Insurers

IMF Working Papers, September 29, 2017

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Interconnectedness of Global Systemically-Important Banks and Insurers

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Bibliographic details

• Authors: Sheheryar Malik, TengTeng Xu
• Published: September 29, 2017
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781484320716.001

Overview

• Research focus: Interconnectedness among global systemically important banks (GSIBs) and global systemically important insurers (GSIIs) and its financial stability implications.
• Sample period: October 2007 to August 2016.
• Data used: publicly-available daily equity returns and intra-day volatility data.
• Geographic scope: United States, Europe, and Asia.

Data and Methodology

• Empirical approach: market-based connectedness analysis using daily equity returns and intra-day volatility; corroboration with a balance sheet oriented systemic risk measure.
• Institutions studied: selected GSIBs and GSIIs headquartered in the United States, Europe, and Asia.
• Time coverage preserved: October 2007 to August 2016.

Key Findings

• Regional clustering:
  • Strong regional clusters of return and volatility connectedness among GSIBs and GSIIs.
• Geographic sources of connectedness:
  • Compared to Asia, selected GSIBs and GSIIs headquartered in the United States and Europe appear to be main sources of market-based connectedness.
• Time variation and stress:
  • Total system connectedness—i.e., among all GSIBs and GSIIs—tends to rise during financial stress.
  • This increase during stress is corroborated by a balance sheet oriented systemic risk measure.
• Macro-financial drivers:
  • Significant influence of economic policy uncertainty on total connectedness among systemically important institutions.
  • Significant influence of U.S. long-term interest rates on total connectedness among systemically important institutions.
• Bank-specific drivers:
  • Bank profitability and asset quality play important roles in driving bank-specific return connectedness.

Implications for Financial Stability and Policy

• Monitoring:
  • Market-based measures of connectedness (equity returns and intra-day volatility) detect strong regional clusters and identify main sources of connectedness across regions.
  • Balance sheet oriented systemic risk measures can corroborate market-based indicators, especially during periods of financial stress.
• Policy focus:
  • Attention to economic policy uncertainty and U.S. long-term interest rate dynamics is important for assessing systemic connectedness among GSIBs and GSIIs.
  • Strengthening bank profitability and asset quality can mitigate bank-specific return connectedness and reduce propagation of stress.

IMF Working Paper: "Interconnectedness of Global Systemically-Important Banks and Insurers" by Sheheryar Malik and TengTeng Xu, September 29, 2017.

Content in this bundle

• Interconnectedness of Global Systemically Important Banks and Insurers, WP/17/210, September 2017
  • Interconnectedness of Global Systemically Important Banks and Insurers, WP/17/210, September 2017 (Markdown version)
  • Interconnectedness of Global Systemically Important Banks and Insurers, WP/17/210, September 2017 (PDF)