United States Banking System: Systemic Risk and Reliability Assessment

Khaldoun Khashanah

Research output: Chapter in Book/Report/Conference proceedingChapterpeer-review

Abstract

Whenever a bank has a large and systemically important role to play in the financial system, it becomes equally important to monitor how much risk it owns as a function of time and how much damage to the system it would cause under scenarios that may lead to its illiquidity or insolvency. The regulator conducts stress tests against each bank to keep capital requirements in check. However, the regulator can only stress test each bank individually. Using the language of SoS, the regulator can stress test components, usually at different snapshots in time, and does not have the tools to stress test the whole SoS through analytic synthesis. The interconnecting links between banks is the missing part of such a systemic stress test. Empirical financial indicators are of great value in providing synthetic information as they act as aggregators of market participants’ positions and intelligence. In this case study, we will develop a simple indicator and heat maps based on credit default swaps (CDSs) that act as a proxy for banks’ credit risk. We will determine how the mutual credit risk between banks can be captured via measuring the relative comovement of CDS spreads expressed in time series of CDS spreads.

Original languageEnglish
Title of host publicationCase Studies in System of Systems, Enterprise Systems, and Complex Systems Engineering
Pages295-309
Number of pages15
ISBN (Electronic)9781466502406
DOIs
StatePublished - 1 Jan 2014

Keywords

  • anasynthesis
  • banking system
  • credit default swaps
  • financial crisis
  • financial indicators
  • sociotechnical systems
  • systemic risk

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