Systemic Importance Index for Financial Institutions: A Principal Component Analysis approach
Systemic Importance Index for Financial Institutions: A Principal Component Analysis approach
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León, C. y Murcia, A. 2012. Systemic Importance Index for Financial Institutions: A Principal Component Analysis approach. ODEON. 7 (mar. 2012).
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Mar 12, 2012
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As a result of the most recent global financial crisis, literature has embraced size, connectedness and substitutability as key indicators for financial institutions’ systemic importance. This paper applies Principal Components Analysis to some metrics for assessing size, connectedness and substitutability, where those metrics rely on a combination of balance sheet data and the application of network theory to large-value payment system’s information. The main results are the following: (i) the three concepts and their metrics are explanatory and non-redundant for differentiating financial institutions’ relative systemic importance; (ii) these metrics allow the construction a PCA-based Systemic Importance Index, a valuable tool for financial authorities’ policy and decision-making; and (iii the importance of the too-connected-to-fail criteria and the presence of non-banking firms among the most systemically important financial institutions in the Colombian case are confirmed.
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Referencias (VER)
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Cepeda, F. (2008). “La topología de redes como herramienta de seguimiento en el Sistema de Pagos de Alto Valor en Colombia”, Borradores de Economía, n.º 513, Banco de la República.
Chan-Lau, J. (2010). “Balance Sheet Network Analysis of Too-connected-to-fail Risk inGlobal and Domestic Banking Systems”, IMF Working Paper, WP/10/107, International Monetary Fund, April.
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De Cadenas, G.; de Mesa, L.; Sanchis, A. (2010). “Systemic Risk, an Empirical Approach”, Banco Santander - Fundación de Estudios de Economía Aplicada, Colección de Estudios, n.º 17.
De Nooy, W.; Mrvar, A.; Batagelj, V. (2005). Exploratory Social network Analysis with Pajek, Cambridge University Press.
Dowd, K. (2005). Measuring Market Risk, John Wiley & Sons.
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Federal Reserve Bank of Dallas. (2003). “Composite Index: A New Measure of El Paso's Economy”, Federal Reserve Bank of Dallas - El Paso Branch, Issue 1.
Feeney, G. & Hester, D. (1964). “Stock Market Indices: A Principal Components Analysis”,Cowles Foundation's Discussion Papers 175, Cowles Foundation, Yale University.
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Haldane, A.G. (2009). “Rethinking the financial network”, Speech delivered at the Financial Student Association (Amsterdam, netherlands), April.
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León, C.; Machado, C.; Cepeda, F.; Sarmiento, M. (2011). “Too-connected-to-fail Institutions and Payments System's Stability: Assessing Challenges for Financial Authorities”, Borradores de Economía, n.º 644, Banco de la República.
Machado, C.; León, C.; Sarmiento, M.; Cepeda, F.; Chipatecua, O.; Cely, Jorge. (2010).“Riesgo Sistémico y Estabilidad del Sistema de Pagos de Alto Valor en Colombia:Análisis bajo Topología de Redes y Simulación de Pagos”, Borradores de Economía,n.º 627, Banco de la República.
Manning, M.; Nier, E.; Schanz, J. (2009). The economics of large-value payments andsettlement: Theory and policy issues for central banks, Oxford University Press.
Merton, R. (1974). “On the Pricing of Corporate Debt: the Risk Structure of Interest Rates”, Journal of Finance, n.º 29.
Morales, M. and Estrada, D. (1974). “A Financial Stability Index for Colombia”, Annals of Finance, 6:555-581, May.
Murcia, A. (2007 ). “Determinantes del acceso al crédito de los hogares colombianos”,Ensayos sobre Política Económica, n.º 55, Banco de la República.
Newman, M.E.J. (2003). “The Structure and Function of Complex Networks”, siam Review, vol. 45, n.º 2.
Newman, M.E.J. (2010). networks, Oxford University Press.
Norman, B.; Brierley, P.; Gibbard, P.; Mason, A.; Meldrum, A. (2009).“A risk-basedmethodology for payment systems oversight”, Journal of Payments Strategy &Systems, vol. 3, n.º 3, August.
Ötker-Robe, I.; Narain, A.; Ilyina, A.; Surti, J., (2011). “The Too-important-to-fail conundrum: impossible to ignore and difficult to resolve”, IMF Staff Discussion note, n.º11/12, International Monetary Fund, May.
Rebonato, R. (2007). Plight of the Fortune Tellers, Princeton University Press.
Rodríguez-Moreno, M. and Peña, J.I. (2011). “Systemic risk measures: the simpler thebetter?”, bis Papers, n.º 60, July 28.
Saunders, A.; Smith, R.C.; Walter, I. (2009). “Enhanced Regulation of Large, ComplexFinancial Institutions”, Restoring Financial Stability (Eds. Acharya, V.V. and Richardson, M.), Wiley Finance.
Soramäki, K.; Bech, M.; Arnold, J.; Glass, R.; Beyeler, W. (2006). “The topology of interbank payments flow”, Federal Reserve Bank of new York Staff Report, n.º 243,March.
Steiner, J. (2006 ). “World University Rankings - A Principal Component Analysis”, Instituto de Estúdios Avançados da Universidade de São Pablo.
Taleb, N.N. (2007). The Black Swan, Random House.
Tucker, P., “Where are the Risks?” (2005). Financial Stability Review, Bank of England,December.
Tumpel-Gugerell, G. (2009). Introductory remarks, Recent advances in modeling systemic risk using network analysis (workshop), European Central Bank, Frankfurt amMain, October 5th.
Tunstel, E.; Seraji, H.; Howard, A. (2001). “Soft Computing Approach to Safe Navigationof Autonomous Planetary Rovers”, Intelligent Control Systems Using Soft Computing Methodologies (Eds. Zilouchian, A. and Jamshidi, M.), CRC Press.
Uribe, J.D. (2011a). “Casting Light on Shadow Banking: Data Needs for Financial Stability”, Speech delivered at the IMF Statistics Department Seminar (Washington D.C.),September 23.
Uribe, J.D. (2011b). “Lessons from the 2008 Financial Crisis: How Financial Infrastructures Mitigate Systemic Fragility”, Speech delivered at the Seacen - Cemla Conference, (Kuala Lumpur, Malaysia), October 13.
Zhou, C. (2009). Are banks too big to fail? Measuring systemic importance of financial institutions, De Nederlandsche Bank.
Banco de la República (BR). (2011). Reporte de Sistemas de Pago - 2011, Banco de laRepública, June.
Basel Committee on Banking Supervision (BCBS-BIS). (2011). Global systemically important banks: assessment methodology and the additional loss absorbency requirement - Consultative Report, Bank for International Settlements, July.
Bech, M. and Garrat, R. (2006). “Illiquidity in the interbank payment system following
Wide-Scale Disruptions”, Federal Reserve Bank of new York Staff Report, n.º 239, March.
Billio, M.; Getmansky, M.; Lo, A.; Pelizzon, L. (2010).“Econometric measures of systemic risk in the finance and insurance sectors”, nBER Working Paper, n.º 16223.
Brunnermeier, M.; Crocket, A.; Goodhart, C.; Persaud, A.D.; Shin, H. (2009). The Fundamental Principles of Financial Regulation, International Center for Monetary and Banking Studies, Centre for Economic Policy Research (cepr), January.
Buechel, B. and Buskens, V. (2008). “The Dynamics of Closeness and Betweenness”, Institute of Mathematical Economics Working Papers, n.º 398, Bielefeld University.
Campbell, J.; Lo, A.; Mackinlay, A.C. (1997). The Econometrics of Financial Markets, Princeton University Press.
Cepeda, F. (2008). “La topología de redes como herramienta de seguimiento en el Sistema de Pagos de Alto Valor en Colombia”, Borradores de Economía, n.º 513, Banco de la República.
Chan-Lau, J. (2010). “Balance Sheet Network Analysis of Too-connected-to-fail Risk inGlobal and Domestic Banking Systems”, IMF Working Paper, WP/10/107, International Monetary Fund, April.
Clark, J. (2010). “Too-networked-to-fail”, Risk
Committee on Payment and Settlement Systems (CPSS-BIS). (2011). Principles for Financial Market Infrastructures - Consultative Report, Bank for International Settlements, March.
Condamin, L.; Louisot, J-P.; Naim, P., Risk. (2006). Quantification: Management, Diagnosis and Hedging, John Wiley & Sons.
De Cadenas, G.; de Mesa, L.; Sanchis, A. (2010). “Systemic Risk, an Empirical Approach”, Banco Santander - Fundación de Estudios de Economía Aplicada, Colección de Estudios, n.º 17.
De Nooy, W.; Mrvar, A.; Batagelj, V. (2005). Exploratory Social network Analysis with Pajek, Cambridge University Press.
Dowd, K. (2005). Measuring Market Risk, John Wiley & Sons.
European Central Bank (ecb). (2010). Financial Stability Review, June.
Federal Reserve Bank of Dallas. (2003). “Composite Index: A New Measure of El Paso's Economy”, Federal Reserve Bank of Dallas - El Paso Branch, Issue 1.
Feeney, G. & Hester, D. (1964). “Stock Market Indices: A Principal Components Analysis”,Cowles Foundation's Discussion Papers 175, Cowles Foundation, Yale University.
Filmer, D.; Pritchett, L. (1998). “Estimating wealth effects without income or expenditure data—or tears: Educational enrollment in India”, World Bank Policy Research Working Paper No, 1994, Development Economics Research Group (decrg), The World Bank.
Gallati, R. (2003). Risk Management and Capital Adequacy, McGraw-Hill.
Garrat, R.; Mahadeva, L.; Svirydzenka, K. (2011). “Mapping systemic risk in the international banking network”, Working Paper, n.º 413, Bank of England, March.
Gómez, E.; Murcia, A.; Zamudio, N. (2011). “Financial Conditions Index: A Leading and Early Warning Indicator for Colombia”, Ensayos sobre Política Económica, vol 29. Num. 66, Banco de la República, December.
Haldane, A.G. (2009). “Rethinking the financial network”, Speech delivered at the Financial Student Association (Amsterdam, netherlands), April.
Hatzius, J.; Hooper, P.; Mishkin, F.S.; Schoenholtz, K.L.; Watson, M.W. (2010). “Financial Conditions Indexes: A Fresh Look After the Financial Crisis”, National Bureau of Economic Research, Working Paper 16150, July.
Hubbard, D.W. (2009). The Failure of Risk Management, John Wiley & Sons.
Ianoka, H.; Ninomiya, T.; Taniguchi, K.; Shimizu, T.; Takayasu, H. (2004). “Fractal network derived from banking transaction - An analysis of network structures formedby financial institutions-“, Bank of Japan Working Paper Series, n.º 04-E-04, April.
International Monetary Fund (IMF ); Bank for International Settlements (bis); Financial Stability Board (fsb). (2009). “Guidance to Assess the Systemic Importance of FinancialInstitutions, Markets and Instruments: Initial Considerations”, October.
Kodres, L. (2009). “The Road to Re-Regulation: Repainting the Center Line and Erecting more Guardrails”, The World Bank and Banco de España International Conference:
“Reforming Financial Regulation and Supervision: Going Back to Basics”, Madrid,June 15.
Kritzman, M.; Li, Y; Page, S.; Rigobon, R. (2010). “Principal Components as a Measureof Systemic Risk”, mit Sloan School Working Paper 4785-10, mit Sloan School of Management, June 28.
León, C. and Machado, C. (2013). “Designing an expert knowledge-based systemic importance index for financial institutions”, Journal of Financial Market Infrastructure, n.º 1, vol. 2.
León, C.; Machado, C.; Cepeda, F.; Sarmiento, M. (2011). “Too-connected-to-fail Institutions and Payments System's Stability: Assessing Challenges for Financial Authorities”, Borradores de Economía, n.º 644, Banco de la República.
Machado, C.; León, C.; Sarmiento, M.; Cepeda, F.; Chipatecua, O.; Cely, Jorge. (2010).“Riesgo Sistémico y Estabilidad del Sistema de Pagos de Alto Valor en Colombia:Análisis bajo Topología de Redes y Simulación de Pagos”, Borradores de Economía,n.º 627, Banco de la República.
Manning, M.; Nier, E.; Schanz, J. (2009). The economics of large-value payments andsettlement: Theory and policy issues for central banks, Oxford University Press.
Merton, R. (1974). “On the Pricing of Corporate Debt: the Risk Structure of Interest Rates”, Journal of Finance, n.º 29.
Morales, M. and Estrada, D. (1974). “A Financial Stability Index for Colombia”, Annals of Finance, 6:555-581, May.
Murcia, A. (2007 ). “Determinantes del acceso al crédito de los hogares colombianos”,Ensayos sobre Política Económica, n.º 55, Banco de la República.
Newman, M.E.J. (2003). “The Structure and Function of Complex Networks”, siam Review, vol. 45, n.º 2.
Newman, M.E.J. (2010). networks, Oxford University Press.
Norman, B.; Brierley, P.; Gibbard, P.; Mason, A.; Meldrum, A. (2009).“A risk-basedmethodology for payment systems oversight”, Journal of Payments Strategy &Systems, vol. 3, n.º 3, August.
Ötker-Robe, I.; Narain, A.; Ilyina, A.; Surti, J., (2011). “The Too-important-to-fail conundrum: impossible to ignore and difficult to resolve”, IMF Staff Discussion note, n.º11/12, International Monetary Fund, May.
Rebonato, R. (2007). Plight of the Fortune Tellers, Princeton University Press.
Rodríguez-Moreno, M. and Peña, J.I. (2011). “Systemic risk measures: the simpler thebetter?”, bis Papers, n.º 60, July 28.
Saunders, A.; Smith, R.C.; Walter, I. (2009). “Enhanced Regulation of Large, ComplexFinancial Institutions”, Restoring Financial Stability (Eds. Acharya, V.V. and Richardson, M.), Wiley Finance.
Soramäki, K.; Bech, M.; Arnold, J.; Glass, R.; Beyeler, W. (2006). “The topology of interbank payments flow”, Federal Reserve Bank of new York Staff Report, n.º 243,March.
Steiner, J. (2006 ). “World University Rankings - A Principal Component Analysis”, Instituto de Estúdios Avançados da Universidade de São Pablo.
Taleb, N.N. (2007). The Black Swan, Random House.
Tucker, P., “Where are the Risks?” (2005). Financial Stability Review, Bank of England,December.
Tumpel-Gugerell, G. (2009). Introductory remarks, Recent advances in modeling systemic risk using network analysis (workshop), European Central Bank, Frankfurt amMain, October 5th.
Tunstel, E.; Seraji, H.; Howard, A. (2001). “Soft Computing Approach to Safe Navigationof Autonomous Planetary Rovers”, Intelligent Control Systems Using Soft Computing Methodologies (Eds. Zilouchian, A. and Jamshidi, M.), CRC Press.
Uribe, J.D. (2011a). “Casting Light on Shadow Banking: Data Needs for Financial Stability”, Speech delivered at the IMF Statistics Department Seminar (Washington D.C.),September 23.
Uribe, J.D. (2011b). “Lessons from the 2008 Financial Crisis: How Financial Infrastructures Mitigate Systemic Fragility”, Speech delivered at the Seacen - Cemla Conference, (Kuala Lumpur, Malaysia), October 13.
Zhou, C. (2009). Are banks too big to fail? Measuring systemic importance of financial institutions, De Nederlandsche Bank.