Flagship Report on Macro-Prudential Policy in the Banking Sector

European System of Financial Supervisio

Systemic Risk Spillovers in the European Banking and Sovereign Network *

Abstract We propose a framework for estimating time-varying systemic risk contributions that is applicable to a high-dimensional and interconnected financial system. Tail risk dependencies and contributions are estimated based on a penalized two-stage fixedeffects quantile approach, which explicitly links time-varying interconnectedness to 1 systemic risk contributions. For the purposes of surveillance and regulation of financial systems, network dependencies in extreme risks are much more relevant than simple (mean) correlations. Thus, the framework provides a tool for supervisors, reflecting market's view of tail dependences and systemic risk contributions. The framework is applied to a system of 51 large European banks and 17 sovereigns in 2006-13, utilizing both equity and CDS prices. We provide new evidence on how banking sector fragmentation and sovereign-bank linkages evolved over the European sovereign debt crisis, and how it is reflected in estimated network statistics and systemic risk measures. Finally, our evidence provides an indication that the fragmentation of the European financial system has peaked

Indirect contagion The policy problem. No 9 / January 2016

This paper represents an attempt to move systemic risk analysis closer to the holism of epidemiology. In doing so, we begin by identifying the fundamental channels of indirect contagion, which manifest even in the absence of direct contractual links. The first is the market price channel, in which scarce funding liquidity and low market liquidity reinforce each other, generating a vicious spiral. The second is information spillovers, in which bad news can adversely affect a broad range of financial firms and markets

Interest rate risk of life insurers: Evidence from accounting data

Life insurers are exposed to interest rate risk as their liability side is typically more sensitive to interest rate changes than their asset side. This paper explores why insurers assume this risk using a new accounting-based method to measure the interest rate sensitivity of assets and liabilities. Calculation at the insurer level yields a wide duration gap with pronounced heterogeneity in the cross-section. This could be explained by alternative investment strategies, such as asset insulation, which are at odds with interest rate risk management. Using a 2014–2018 panel, factors associated with interest rate risk support this view