Asymmetric Covar: An Application to International Banking

Abstract

In this paper we measure the systemic risk in a set of large international banks. We first measure the contribution of a financial institution to international systemic risk. Importantly, we show the existence of an asymmetric non-linear contribution of banks to systemic risk depending on whether they experience negative or positive returns. In particular, we show that the more systemic a bank is, the more asymmetry it exhibits. Using the CoVaR methodology recently proposed by Adrian and Brunnermeier (2009), we show that the short-term debt to assets ratio (liquidity risk) is a key factor behind systemic risk. We find no evidence that a higher bank size increases systemic risk.

Keywords: Systemic risk, Global banking, CoVaR

JEL Classification: C30, G01, G20