Systemic Risk Assessment and Oversight

 Published On: Feb, 2013 |  Published By: Risk


Focusing on financial institutions in isolation during the 2007–2009 financial crisis resulted in a serious underestimation of the wider systemic risk in play. Systemic Risk Assessment and Oversight addresses this analytical gap by outlining a bottom-up portfolio approach to systemic risk, allowing you to fully understand, analyse and prepare for this pervading risk.


The global financial crisis uncovered an important gap in the risk assessment of institutions operating in the supervised and shadow financial systems. Namely, risk assessments, either in private or policy making institutions, centred on the risk of a financial institution in isolation, abstracting from its risks to and exposure from the overall financial system.

By overlooking systemic risk, a majority of analysts missed the severity of the 2007–2009 financial crisis, the extent of the contagion across institutions, and the magnitude of the losses incurred in the financial system, resulting in larger and preventable losses.

An understanding and analysis of systemic risk is now more important than ever for navigating the fluctuations of and interactions between financial institutions in a post-crisis world.

Systemic Risk Assessment and Oversight provides you with analytical tools for measuring systemic risk and conducting surveillance to address the analytical gaps uncovered by the financial crisis. It places practical tools and methods in the hands of market practitioners and policy analysts.

Establishing a bottom-up portfolio approach to systemic risk, Jorge Chan-Lau of the IMF provides you with a multitude of ready-to-implement methods and tools for analysing systemic risk. Whilst they can each be used independently, Systemic Risk Assessment and Oversight outlines a unified framework so you can understand how risk flows from individual institutions to the system and vice-versa.

Key topics examined include:
• CoRisk
• Quantile regressions
• Balance-sheet network analysis
• Z-scores
• Tail dependence
• Dynamic conditional correlation

The output of the tools presented in this key text will facilitate communication to senior management and guide strategy and policy decisions in financial institutions entwined in the system. Systemic Risk Assessment and Oversight is a how-to manual on systemic risk, illustrated with key cases and examples for risk managers, analysts, CROs, regulators, supervisors and strategists.

Jing Zhang
Managing Director, Global Head of Quantitative Research, Moody’s Analytics


Part 1 - Systemic risk: why it matters to market and policy practitioners

1 The Importance of Systemic Risk Oversight

- Systemic risk: the G20 operational definition
- The financial network topology
- The endogeneity of systemic risk
- The shadow banking system
- Regulatory and institutional framework

2 A Bottom-Up Approach to Systemic Risk

- Interconnectedness
- Feedback between the real and financial sectors
-The bottom-up approach

Part 2 - Measuring the risk of individual institutions

3 Fundamental Information and Firm-Level Risk

- Ratings-based methods
- Credit-scoring (or accounting-based) methods
- Macroeconomic models
- Hybrid models

4 Extracting Risk Measures from Credit Derivatives and Bonds

- Credit default swaps
- Bonds
- Bonds or credit default swaps?

5 Equity-Implied Methods and Risk Neutrality Transformations

- The option-based approach to default risk
- Distance-to-default and variations
- Equity prices of CDS spreads?
- From risk-neutral probabilities to real world probabilities

Part 3 - From institution-specific risk to systemic risk

6 Systemic Risk Measurement: Statistical Methods

- Correlation analysis
- Serial correlation and illiquidity
- Financial stress indices
- Principal component analysis
- Tail dependence
- Dynamic conditional correlation

7 CoRisk: Quantile Regressions in Practice

- The quantile regression model: a helicopter tour
- Constructing CoRisk measures using quantile regressions

8 Balance-Sheet Network Analysis

- Mapping the financial network into directed graphs
- Network analysis and the basic accounting identity
- Sequential defaults and systemic risk measures
- Balance-sheet based network analysis in practice
- Two open questions: cluster dynamics and incomplete data

9 The Portfolio-Based Approach to Systemic Risk

- The incremental contribution to systemic risk (ICSR)
- Estimating conditional probabilities of default
- Constructing loss distributions: the one-factor credit portfolio model
- An example: systemic risk in the global banking system
- Linking the ICSR to too-big-to-fail risk and the total contribution to systemic risk
- A comparison between ICSR and other portfolio approaches to systemic risk

10 The Regulation of Systemic Risk

- Financial cycles and the real economy
- The macroprudential approach to regulation
- The overall economic policy context
- Systemic risk oversight organisational challenges

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