Time: 1.00 - 2.00pm Venue: Room 3.21, Old Building, LSE (map)
Speaker: Giovanni Covi (Bank of England)
Seminar Title: On the Origins of Systemic Risk

Abstract: Systemic risk in the banking sector, i.e. the probability to have a large number of banks going into distress simultaneously, is usually associated with long periods of economic downturns and very large social costs. On one hand, shocks coming from common exposures towards the real economy may induce correlation in banks’ default probabilities thereby increasing the likelihood for systemic events. On the other hand, financial contagion and market failures may also play an important role in generating large-scale market failures. We propose a microstructural model calibrated on a new granular datasets able to disentangle the different sources of systemic risk and identify its main drivers for the Euro Area banking system. Our results show that common exposures to the real economy represent a source of risk for individual bank distress but less so for systemic events. Systemic events, in turn, are possible due to the interaction between common economic shocks, weakening banks’ balance sheets, and financial contagion channels. The results obtained with the simulation engine nicely resemble common market-based systemic risk indicators.