Measuring Systemic Risk on the Indonesia’s Banking System
DOI:
https://doi.org/10.31685/kek.v2i2.325Keywords:
Inter-connectedness, systemic risk, Principal Component Analysis, Granger causality, regime switchingAbstract
Inter-connectedness is one important aspect in measuring the degree of systemic risk arising in the banking system. In this paper, this aspect besides the degree of commonality and volatility are measured using Principal Component Analysis (PCA), dynamic Granger causality tests and a Markov regime switching model. These measures can be used as leading indicators to detect pressures in the financial system, in particular the banking system. There is evidence that the inter-connectedness level together with degree of commonality and volatility among banks escalate substantially during the financial distress. It implies that less systemically important banks could become more important in the financial system during the abnormal times. Therefore, the list of systemically important banks as regulated in the Law on Prevention and Mitigation of Financial System Crisis (UU PPKSK) should be updated more frequently during the period of financial distress.References
Aikman, David, Piergiorgio Alessandri, Bruno Eklund, Prasanna Gai, Sujit Kapadia, Elizabeth Martin, Nada Mora, Gabriel Sterne, and Matthew Willison. 2009. “Funding Liquidity Risk in a Quantitative Model of Systemic Stability.†SSRN Electronic Journal. doi:10.2139/ssrn.1420062.
Allen, Franklin, and Douglas Gale. 2007. Systemic Risk and Regulation. The Risks of Financial Institutions. Vol. I. University of Chicago Press.
Anandarajan, Murugan, Picheng Lee, and Asokan Anandarajan. 2001. “Bankruptcy Prediction of Financially Stressed Firms: An Examination of the Predictive Accuracy of Artificial Neural Networks.†International Journal of Intelligent Systems in Accounting, Finance & Management 10 (2): 69–81. doi:10.1002/isaf.199.
Barber, Joel R., and Mark L. Copper. 2012. “Principal Component Analysis of Yield Curve Movements.†Journal of Economics and Finance 36 (3). Springer US: 750–65. doi:10.1007/s12197-010-9142-y.
Bartram, Söhnke M., Gregory W. Brown, and John E. Hund. 2007. “Estimating Systemic Risk in the International Financial System.†Journal of Financial Economics 86 (3): 835–69. doi:10.1016/j.jfineco.2006.10.001.
Bekaert, Geert, and Campbell R. Harvey. 1995. “Time-Varying World Market Integration.†The Journal of Finance 50 (2). Blackwell Publishing Ltd: 403–44. doi:10.1111/j.1540-6261.1995.tb04790.x.
Bhansali, Vineer, Robert Gingrich, and Francis A. Longstaff. 2008. “Systemic Credit Risk: What Is the Market Telling Us?†Financial Analysts Journal 64 (4). CFA Institute : 16–24. doi:10.2469/faj.v64.n4.2.
Billio, Monica, Massimiliano Caporin, Loriana Pelizzon, and Domenico Sartore. 2012. “CDS Industrial Sector Indices, Credit and Liquidity Risk.†SSRN Electronic Journal. doi:10.2139/ssrn.2103076.
Billio, Monica, Mila Getmansky, Andrew W. Lo, and Loriana Pelizzon. 2010. “Measuring Systemic Risk in the Finance and Insurance Sectors.†NBER Working Paper. Cambridge, MA; Alfred P. Sloan School of Management, Massachusetts Institute of Technology. http://dspace.mit.edu/handle/1721.1/66679.
Brunnermeier, Markus K. 2008. “Deciphering the Liquidity and Credit Crunch 2007- 08.†Journal of Economic Perspectives 23: 77–100. doi:10.1257/jep.23.1.77.
Brunnermeier, Markus K., and Martin Oehmke. 2013. “Chapter 18 – Bubbles, Financial Crises, and Systemic Risk.†In Handbook of the Economics of Finance, 2:1221–88. doi:10.1016/B978-0-44-459406-8.00018-4.
DanÃelsson, Jón, and Francisco Peñaranda. 2011. “On the impact of fundamentals, liquidity, and coordination on market stability*.†International Economic Review 52 (3): 621–38. doi:10.1111/j.1468-2354.2011.00642.x.
de Bandt, Olivier, and Philipp Hartmann. 2000. “Systemic Risk: A Survey.â€
De Nicolo, Gianni, and Marcella Lucchetta. 2009. “Financial Intermediation, Competition, and Risk: A General Equilibrium Exposition.†SSRN Electronic Journal. doi:10.2139/ssrn.1635244.
Diamond, Douglas W, and Raghuram G. Rajan. 2009. “The Credit Crisis: Conjectures about Causes and Remedies.†In American Economic Review, 99:606–10. doi:10.1257/aer.99.2.606.
Duong, Diep, and Norman R. Swanson. 2011. “Volatility in Discrete and Continuous-Time Models: A Survey with New Evidence on Large and Small Jumps.†In , 179–233. doi:10.1108/S0731-9053(2011)000027B006.
Forbes, Kristin, and Roberto Rigobon. 2001. “Measuring Contagion: Conceptual and Empirical Issues.†In International Financial Contagion, 43–66. Boston, MA: Springer US. doi:10.1007/978-1-4757-3314-3_3.
Goldstein, Ma, Gl Kaminsky, and Carmen Reinhart. 2000. “Assessing Financial Vulnerability: An Early Warning Signals for Emerging Markets,†no. 13629: 1–56.
Gonzalez-Hermosillo, Brenda, Ceyla Pazarbasioglu, and Robert Billings. 1997. “Determinants of Banking System Fragility: A Case Study of Mexico.†Staff Papers - International Monetary Fund 44 (3). Palgrave Macmillan UK: 295. doi:10.2307/3867561.
Guidolin, Massimo. 2011a. “Markov Switching in Portfolio Choice and Asset Pricing Models: A Survey.†In , 87–178. doi:10.1108/S0731-9053(2011)000027B005.
———. 2011b. “Markov Switching Models in Empirical Finance.†In , 1–86. doi:10.1108/S0731-9053(2011)000027B004.
Hardy, Daniel C., and Ceyla Pazarbaşioğlu. 1999. “Determinants and Leading Indicators of Banking Crises: Further Evidence.†IMF Staff Papers. Vol. 46. Palgrave Macmillan UK. doi:10.2307/3867642.
Hartmann, Philipp, Stefan Straetmans, and Cg De Vries. 2005. “Banking System Stability: A Cross-Atlantic Perspective.†Woking Paper Series. University of Chicago Press, 133–88. doi:10.3386/w11698.
Huang, Xin, Hao Zhou, and Haibin Zhu. 2009. “A Framework for Assessing the Systemic Risk of Major Financial Institutions.†Journal of Banking & Finance 33 (11): 2036–49. doi:10.1016/j.jbankfin.2009.05.017.
Johnson, Richard A., and Dean W. Wichern. 2002. Applied Multivariate Statistical Analysis. Pearson Education International.
Kaminsky, Graziela, Saul Lizondo, and Carmen M Reinhart. 1998. “Leading Indicators of Currency Crises.†International Monetary Fund Staff Papers. Vol. 45.
Lehar, Alfred. 2005. “Measuring Systemic Risk: A Risk Management Approach.†Journal of Banking & Finance 29 (10): 2577–2603. doi:10.1016/j.jbankfin.2004.09.007.
McLeod, Ross. 2004. “Dealing with Bank System Failure: Indonesia, 1997-2003.†Bulletin of Indonesian Economic Studies 40 (1): 95–116. doi:10.1080/0007491042000205222.
Shin, Hyun Song. 2012. “Procyclicality and the Search for Early Warning Indicators.†Financial Crises: Causes, Consequences, and Policy Response, 1–16. doi:10.5089/9781484320839.001.
Syaifullah, Ronald Yusuf, Munafsin Al Arif, Alfan Mansur, Priska Amalia, and Nurul Fatimah. 2016. “Weekly Economic and Financial Report 14-20 March 2016.†Jakarta.
Wong, Woon K. 2008. “Backtesting Trading Risk of Commercial Banks Using Expected Shortfall.†Journal of Banking & Finance 32 (7): 1404–15. doi:10.1016/j.jbankfin.2007.11.012.
Downloads
Published
Issue
Section
License
STATEMENT OF AUTHENTICITY AND COPYRIGHT RELEASE
I hereby certify that:
- The article (Article title) is authentic and never being published previously or will be published in other publication as well as not a plagiarism in any form.
- The article does not have any issue with other parties, regarding of the publication copyright.
- All the authors have read this statement and agree with the name and sequence.
- Hereby, I transfer the copyright of my article (Article title) to the KEK Editorial Board . this copyright transfer includes a right to reproduce a photograph for the similar article and its translation. This is also including a right to upload the article into a computer system which disseminated widely on the internet.
- Hereby, I agree with my article (Article title) to be published by KEK Volume (xx) Edition (x), under Creative Common Attribution- NonCommercial-ShareAlike 4.0 licensing. This is also including a right to upload the article into a computer system which disseminated widely on the internet.
Name : (Full Name)
Date : (Signing date)
(Profile on Google Scholar)
