Graph Mining Based SOM: A Tool to Analyze Economic Stability

Since the global financial crisis, banking regulators and academics have extended the traditional, narrow definition of to encompass concepts such as interconnectedness and shadow banking. But, at the time of writing, a definition of systemic risk that covers all of the factors that precipitated the global financial crisis is still emerging. This paper first describes the debate around the emerging definition(s) of systemic risk and discusses some of the initiatives to address systemic risk by international regulators. These initiatives include microprudential regulations, such as increasing capital for systemically important banks, and macroprudential initiatives, such as the creation of the European Systemic Risk Board. Recognizing that systemic risks arise not only from credit and market risk factors, this paper views systemic risk through the lens of operational risk, arguing that key risk factors, especially people and process risks, were pervasive across the global financial industry prior to the global financial crisis and, consequently, operational risk must be considered as a contributor to, and in some instances a trigger for, systemic risk. The paper goes on to describe the microprudential approach to operational risk within the Basel II regulations and identifies and describes operational risks that were present prior to the global financial crisis. The paper concludes that there is indeed a systemic dimension to operational risk that should be recognized and addressed by banking regulators.Finally, the paper makes some suggestions as to how the management of systemic operational risks may be addressed by banks and regulators.

Systemic risk refers to risks that have a broad and severe impact on the entire financial system or economic system. There are similarities in the definition of systemic risk in China and abroad, which usually refer to threats to the entire financial system or economic system, which can trigger a chain reaction and lead to a systemic collapse. In terms of characteristics and measurements, there may be some differences in views and methods at home and abroad. While foreign countries usually pay more attention to the interconnectedness of financial institutions, market liquidity, macroeconomic factors, etc., China may pay more attention to factors such as the stability of financial markets and the role of state-owned enterprises and governments in the economy. The shortcomings of systemic risk abroad may lie in the fact that the unique circumstances of some characteristic countries or regions are sometimes overlooked, because these factors are not universally applicable on a global scale. Due to its unique environment of large economic size, complex financial system, government intervention, and the influence of state-owned enterprises, the study of systemic risk is particularly important for China. This particular situation may require unique methods and metrics to measure and address risks to ensure the stability and sustainability of China's financial system. It is precisely in view of the lack of foreign research on China's specific context that it is of great significance to study the systemic risk of China's banking industry under China's financial system.

The Covid-19 pandemic has brought about a heavy impact on the world economy, which arouses growing concerns about potential systemic risk, taking place in countries and regions. At this critical moment, it makes sense to interpret the systemic risk from the perspective of the financial crisis framework. By combing the latest research on systemic risks, we may arrive at some precautions relating to the current events. This literature review verifies the origin of systemic risk research. By comparing the retrieved and screened systemic literature with the relevant research on the financial crisis, more focus on the micro-foundations of systemic risk has been discovered. Besides, the measurement methods of systemic risks and the introduction of interdisciplinary methods have made the research in this field particularly active. This paper synthesizes the previous research conclusions to find the appropriate definition of systemic risk and combs the research literature of systemic risk from two lines: Firstly, conducting the division according to the sub-branch fields within the financial discipline and the relevant interdisciplinary research methods, which is helpful for scholars within and outside the discipline to have a more systematic understanding of the research in this field. Secondly predicting the research direction that can be expanded in this field.

Insurers as Systemically Important Financial Institutions (SIFIs)? Exploration and Methodology

Despite the acknowledgment of the relevance of Systemic Risk, there is a lack of consensus on its definition and, more importantly, on the way it should be measured. Fortunately, there is a growing research agenda and more financial regulators, central bankers, and academics have recently been focusing on this field. In this chapter, the authors obtain a distribution of losses for the banking system as a whole. They are convinced that such distribution of losses is the key element that could be used to develop relevant measures for systemic risk. Their model contemplates several aspects, which they consider important regarding the concept of systemic risk: an initial macroeconomic shock, which weakens some institutions (some of them to the point of failure), a contagion process by means of the interbank market, and the resulting losses to the financial system as a whole. Finally, once the distribution is estimated, the authors derive standard risk measures for the system as a whole, focusing on the tail of the distribution (where the catastrophic or systemic events are located). By using the proposed framework, it is also possible to perform stress testing in a coherent way, including second round effects like contagion through the interbank market. Additionally, it is possible to follow the evolution of certain coherent risk measures, like the CVaR, in order to evaluate if the system is becoming more or less risky, in fact, more or less fragile. Additionally, the authors decompose the distribution of losses of the whole banking system into the systemic and the contagion elements and determine if the system is more prone to experience contagious difficulties during a certain period of time.

Systemic Importance of Financial Institutions: Regulations, Research, Open Issues, Proposals

Purpose: This study develops a novel methodology for measuring systemic risk through a multidimensional approach, focusing on the impact of exogenous factors. By identifying systemic risk and analysing individual risk factors, we aim to provide a more comprehensive understanding of vulnerabilities in the financial sector. Design/methodology/approach: We use econometric models to assess systemic risk, applying our method to eight systemically important financial institutions in Poland between 2005 and 2023. Our analysis covers various risk factors, including climate risk, stock market fluctuations, and interbank liquidity, enabling both isolated and overall assessment of the impact of exogenous shocks on the system. Findings: Our results show that climate risk is becoming increasingly significant, particularly in light of recent crises such as the COVID-19 pandemic and Russia's invasion of Ukraine. We also observe an increase in systemic risk during specific periods (2008-2009 and 2011 2013), with the impact of individual shocks varying. Research limitations/implications: Our results highlight the need for sophisticated, multidimensional analyses of systemic risk to enhance the resilience of financial systems against diverse shocks. Practical implications: This research contributes to the existing literature by offering a universal framework for assessing systemic risk that aggregates multiple exogenous factors, particularly emphasizing the often-overlooked role of climate risk. Social implications: The research provides a framework for identifying systemic risks, including climate-related vulnerabilities, enabling policymakers to enhance the resilience of financial systems and protect societal stability against diverse economic and environmental shocks. Originality/value: Importantly, we are the first to combine transition risk indicated by stranded assets with physical risk, measured by temperature deviations from the multi-year average, in the assessment of Polish systemic climate risk.

The Federal Reserve Bank of New York released a report -- New Directions for Understanding Systemic Risk -- that presents key findings from a cross-disciplinary conference that it cosponsored in May 2006 with the National Academy of Sciences' Board on Mathematical Sciences and Their Applications. The pace of financial innovation over the past decade has increased the complexity and interconnectedness of the financial system. This development is important to central banks, such as the Federal Reserve, because of their traditional role in addressing systemic risks to the financial system. To encourage innovative thinking about systemic issues, the New York Fed partnered with the National Academy of Sciences to bring together more than 100 experts on systemic risk from 22 countries to compare cross-disciplinary perspectives on monitoring, addressing and preventing this type of risk. This report, released as part of the Bank's Economic Policy Review series, outlines some of the key points concerning systemic risk made by the various disciplines represented - including economic research, ecology, physics and engineering - as well as presentations on market-oriented models of financial crises, and systemic risk in the payments system and the interbank funds market. The report concludes with observations gathered from the sessions and a discussion of potential applications to policy. The three papers presented in this conference session highlighted the positive feedback effects that produce herdlike behavior in markets, and the subsequent discussion focused in part on means of encouraging heterogeneous investment strategies to counter such behavior. Participants in the session also discussed the types of models used to study systemic risk and commented on the challenges and trade-offs researchers face in developing their models.

This paper contributes to the finance literature by investigating the risk contagion and bailout effects in the global financial system. We use the bilateral exposure matrix to examine the impact of credit shocks and liquidity shocks on the global financial system when a Global Systemically Important Bank (G-SIB) is supposed to be in distress. The findings indicate that the global financial network is dominated by large and medium-sized financial institutions. Credit shocks does not play a significant role in risk contagion nor do they trigger the systemic risk in the global financial system. However, the global financial network is more vulnerable to liquidity shocks than to credit shocks. If a credit shock and liquidity shock overlaps with each other, the hybrid shock can exacerbate the risk contagion effects and lead to rapid propagation throughout the global financial network. If a regulator bails out the distressed institutions, the bailout efficiency increases with the number of rescued institutions. However, the improvement in of bailout efficiency decreases with the number of rescued institutions. If a regulator can promote financial institutions to raise the rollover ratio, the financial system will be more robust to shocks. This paper provides a ground view of systemic risks contagion and sheds light on directions for future research on systemic risk contagion in the global financial system. • The credit shock does not play a significant role in risk contagion in the global financial system. However, the liquidity shock has shown more substantial effects than that of the credit shock. • If the credit shock and liquidity shock overlaps with each other, the contagion effects are amplified. • If the regulator implements the bailout, the total rescue effects in the second round is better than that of other rounds. • If the financial institutions can raise the rollover ratio, the impact of systemic risk could be reduced significantly.

Margin Requirements and Systemic Liquidity Risk

Margin requirements and systemic liquidity risk

Subject Outlook for P2P lending. Significance Financial technology ('fintech') threatens to transform some traditional financial sector activities. In particular, online intermediation between lenders and borrowers could disrupt the established banking and consumer finance industries. Peer-to-peer (P2P) lending may advance quickly. Impacts The entry of one of the tech giants into the market might accelerate the development of P2P lending. Large banks may acquire or develop P2P platforms and reduce exposure to traditional lending aimed at consumers and small businesses. As P2P lending is much less interconnected with the financial system than traditional banking, it will pose less systemic risk. However, if P2P platforms expand to take deposits or borrow or lend in the interbank market, they could increase systemic risk.

Interbank market, stock market, and bank performance in East Asia

The role of loan portfolio losses and bank capital for Asian financial system resilience

The interconnectedness of financial institutions affects instability and credit crises. To quantify systemic risk we introduce here the PD model, a dynamic model that combines credit risk techniques with a contagion mechanism on the network of exposures among banks. A potential loss distribution is obtained through a multi-period Monte Carlo simulation that considers the probability of default (PD) of the banks and their tendency of defaulting in the same time interval. A contagion process increases the PD of banks exposed toward distressed counterparties. The systemic risk is measured by statistics of the loss distribution, while the contribution of each node is quantified by the new measures PDRank and PDImpact. We illustrate how the model works on the network of the European Global Systemically Important Banks. For a certain range of the banks’ capital and of their assets volatility, our results reveal the emergence of a strong contagion regime where lower default correlation between banks corresponds to higher losses. This is the opposite of the diversification benefits postulated by standard credit risk models used by banks and regulators who could therefore underestimate the capital needed to overcome a period of crisis, thereby contributing to the financial system instability.