Systemic Risk Rankings and Network Centrality in the European Banking Sector

50 Pages Posted: 23 Sep 2015

See all articles by Valerie De Bruyckere

Valerie De Bruyckere

Ghent University - Department of Financial Economics

Date Written: September 22, 2015

Abstract

This paper presents a methodology to calculate the Systemic Risk Ranking of financial institutions in the European banking sector using publicly available information. The proposed model makes use of the network structure of financial institutions by including the stock return series of all listed banks in the financial system. Furthermore, a wide set of common risk factors (macroeconomic risk factors, sovereign risk, financial risk and housing price risk) is included to allow these factors to affect the banks. The model uses Bayesian Model Averaging (BMA) of Locally Weighted Regression models (LOESS), i.e. BMA-LOESS. The network structure of the financial sector is analysed by computing measures of network centrality (degree, closeness and betweenness) and it is shown that this information can be used to provide measures of the systemic importance of institutions. Using data from 2005 (2nd quarter) to 2013 (3rd quarter), this paper provides further insight into the time-varying importance of risk factors and it is shown that the model produces superior conditional out-of-sample forecasts (i.e. projections) than a classical linear Bayesian multi-factor model.

Keywords: Systemic risk, financial networks, Bayesian Model Averaging, Locally Weighted Regression, bank stock returns

JEL Classification: C52, C58, G15, G21

Suggested Citation

Bruyckere, Valerie De, Systemic Risk Rankings and Network Centrality in the European Banking Sector (September 22, 2015). ECB Working Paper No. 1848, Available at SSRN: https://ssrn.com/abstract=2664152 or http://dx.doi.org/10.2139/ssrn.2664152

Valerie De Bruyckere (Contact Author)

Ghent University - Department of Financial Economics ( email )

Ghent, 9000
Belgium

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