ECB published an article that uses large exposure data to gauge the systemic importance of single supervisory mechanism (SSM) significant institutions. It presents stylized facts from the euro area network of large exposures and derives model-based interconnectedness measures of SSM significant institutions.
The article explores SSM significant institutions’ supervisory reporting of large exposures to gauge the interconnections in the interbank network and beyond, along with the related contagion risk. The article first describes the construction of the interbank network, based on large exposure reporting, and sets out key features of the network. It then examines the macro-prudential policy tools available for addressing systemic risks related to interconnectedness. Next, the measures of interconnectedness, based on the large exposure network, are put into the perspective of existing macro-prudential measures, before providing the final conclusion. The article contains the following key findings:
- The interbank network is relatively sparse and suggests a core-periphery network structure.
- The more complex network measures on average correlate highly with the more simple size-based interconnectedness indicators, constructed following the EBA guidelines on the calibration of other systemically important institutions (O-SII) buffers.
- Policymakers can derive value by considering network-based measures in addition to the size-based interconnectedness indicators, as for some banks these measures can deviate considerably.
Related Link: ECB Article
Keywords: Europe, EU, Banking, Large Exposures, Systemic Risk, SSM, Supervisory Reporting, Macro-prudential Policy, ECB
Sam leads the quantitative research team within the CreditEdge™ research group. In this role, he develops novel risk and forecasting solutions for financial institutions while providing thought leadership on related trends in global financial markets.
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