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Measuring systemic risk in the Colombian financial system: A systemic contingent claims approach

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The financial crisis of the late 2000s underscored the importance of identifying systemically significant institutions and developing mechanisms to internalise the externalities they create on the economy should they fail. Using monthly data for the period between September 2001 and March 2011, bankspecific probabilities of default and expected losses given default are calculated. Subsequently, the joint distribution of such expected losses is estimated and the aggregate cost of the implicit bailout option for the government is quantified. Results suggest that even though systemic risk is currently not a major concern in the Colombian banking system, quantifying these risks helps to enhance the supervisory and regulatory framework. Continuous monitoring of the joint expected losses given default should assist in anticipating future stress scenarios and, as such, constitutes a powerful macroprudential tool for policymakers.
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Keywords: Black–Scholes–Merton; contingent claims; copula; macroprudential supervision; systemic risk

Document Type: Research Article

Publication date: July 1, 2013

More about this publication?
  • Journal of Risk Management in Financial Institutions is the essential professional and research journal for all those involved in the management of risk at retail and investment banks, investment managers, broker-dealers, hedge funds, exchanges, central banks, financial regulators and depositories, as well as service providers, advisers, researchers and academics. Guided by expert Editors and an eminent Editorial Board, each quarterly 100-page issue does not publish advertising but rather in-depth articles, reviews and applied research by leading professionals and researchers in the field on six key inter-related areas: strategic and business risk, financial risk, including traditional/exotic credit, market and liquidity risks, operational risk, regulatory and legal risks, systemic risk, and sovereign risk.

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