This paper uses the same methodology to examine the systemic risk in a heterogeneous banking system consisting of twenty-two banks from eight economies in Asia and the Pacific. The increase in the perceived systemic risk was mainly driven by the heightened risk aversion and the squeezed liquidity.
The current global financial crisis has caused policymakers to reconsider the institutional framework for overseeing the stability of their financial systems. At an international level, a series of recommendations have been made covering various aspects of financial regulation and supervision. It has become generally accepted that the traditional micro-prudential or firm-level approach to financial stability needs to be complemented with a system-wide macro-prudential approach, i.e., to pay greater attention to individual institutions that are systemically important.
This paper extends the methodology in Huang, Zhou, and Zhu (2009) to examine the systemic risk in a heterogeneous banking system consisting of twenty-two banks from eight economies in Asia and the Pacific. The results are helpful to understand the spillover mechanism of the international crisis to the region. It seems that the elevated systemic risk in the region is initially driven by the rising risk aversion, as a spillover effect from the global financial crisis. But since the fourth quarter of 2008, both actual default risk and risk premia are rising as the global financial crisis turned into a real economic recession.
A decomposition analysis shows that the marginal contribution of individual banks to the systemic risk is mostly determined by its size, or the “too big to fail” doctrine.
Our approach makes a first attempt toward the changing direction in bank supervision and regulation, among many concurrent studies. The methodology proposed in this paper provides a possible operational tool to solve important questions in this area: How to measure the systemic risk of a financial system? How to identify systemically important financial institutions? How to allocate systemic capital charge to individual banks? Going forward, a fruitful area for future research is to develop and improve an operational framework, including the appropriate policy instruments, to conduct macroprudential supervision and to assess a systemic capital charge. Challenges remain on both the methodology and implementation fronts.
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