Measuring Systemic Risk in the U.S. Banking System

41 Pages Posted: 12 Sep 2018 Last revised: 15 Dec 2018

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Félix J. López-Iturriaga

Universidad de Valladolid - Department of Finance and Accounting; National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy

Ivan Sanz

University of Valladolid - Faculty of Economic Science and Business Studies

Date Written: August 29, 2018

Abstract

This paper develops a novel measure of systemic risk that combines mapping technology and regression methods. Self-organizing maps (SOM) and lasso logistic regressions are employed to estimate default probabilities for individual U.S. commercial banks from 2001 to 2017. Subsequently, these probabilities are aggregated into a size-weighted measure of systemic risk dubbed SYSTEM. Empirical results show that, due primarily to large banks, volatility in systemic risk increased in 2005 followed by a very large spike from late 2006 to 2008 related to the financial crisis. Comparative tests to the popular systemic risk measure SRISK reveal that SYSTEM: (1) provided earlier warning signals of the impending 2008−2009 crisis; and (2) indicated relatively lower systemic risk after 2012. Further tests show that SYSTEM and SRISK are useful in predicting industry-wide nonperforming loans and numbers of bank failures. We conclude that micro- and macro-prudential measures of bank condition are useful in assessing and predicting systemic risk.

Keywords: Systemic risk, commercial banks, self-organizing maps

JEL Classification: C35, C49, G21, G18

Suggested Citation

Kolari, James W. and Lopez-Iturriaga, Felix Javier and Sanz, Ivan, Measuring Systemic Risk in the U.S. Banking System (August 29, 2018). Available at SSRN: https://ssrn.com/abstract=3240743 or http://dx.doi.org/10.2139/ssrn.3240743

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Felix Javier Lopez-Iturriaga

Universidad de Valladolid - Department of Finance and Accounting ( email )

Avda. Valle Esgueva 6
47011 Valladolid
Spain
+34 983 184 395 (Phone)
+34 983 183830 (Fax)

National Research University Higher School of Economics - International Laboratory of Intangible-driven Economy ( email )

Lebedeva,27
Perm, Perm 614070
Russia

Ivan Sanz

University of Valladolid - Faculty of Economic Science and Business Studies ( email )

Avenida Valle Esgueva, 6
Valladolid
Spain

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