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Risk Assessment for Banking Systems
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Risk Assessment for Banking Systems

Author

Listed:
  • Helmut Elsinger

    (Department of Finance, University of Vienna, Brünner Strasse 72, A-1210 Vienna, Austria)

  • Alfred Lehar

    (Haskayne School of Business, University of Calgary, 2500 University Drive NW, Calgary, Alberta, Canada T2N 1N4)

  • Martin Summer

    (Economic Studies Division, Oesterreichische Nationalbank, Otto-Wagner-Platz 3, A-1011 Vienna, Austria)

Abstract

We propose a new approach to assess systemic financial stability of a banking system using standard tools from modern risk management in combination with a network model of interbank loans. We apply our model to a unique data set of all Austrian banks. We find that correlation in banks' asset portfolios dominates contagion as the main source of systemic risk. Contagion is rare but can nonetheless wipe out a major part of the banking system. Low bankruptcy costs and an efficient crisis resolution policy are crucial to limit the systemwide impact of contagious default events. We compute the "value at risk" for a lender of last resort and find that the funds necessary to prevent contagion are surprisingly small.

Suggested Citation

  • Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
    • Handle: RePEc:inm:ormnsc:v:52:y:2006:i:9:p:1301-1314
    DOI: 10.1287/mnsc.1060.0531
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    More about this item

    Keywords

    systemic risk; financial stability; risk management; interbank market;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General
    • C81 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Microeconomic Data; Data Access
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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