Systemic Risk In Financial Institutions

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Systemic risk and systemically important financial institutions
This section discusses the role played by SIFIs, the drivers of systemic risk in the recent crisis and highlight the importance of regulating these institutions.
3.1 Identification of SIFIs
Financial institutions play key role in the economy by conducting transactions which includes accepting deposits, providing commercial, real estate and mortgage loans and issuing share certificates.
These institutions are not only commercial banks but also include investment banks, insurance companies, hedge funds and brokerages among others. However, these institutions have negative impact to the entire economy when they fail or are in distress. Therefore it is necessary to monitor these institutions …show more content…

Absence
22 Systemic risk and systemically important financial institutions of regulation may lead financial institutions taking excessive leverage that may cause negative externalities. For instance, excessive leverage created systemic risk that led to near to failure of LTCM in 1998.
There are different ways that one could use to measure leverage of a given financial system.
These include;
• Using total assets to total equity ratio (Wei et al. (2014)) or total debt to total equity ratio. • Using options, through buying securities on margin or through some financial instruments
(Cummins and Weiss (2014)).
• Off-balance sheet obligations relative to total equity ratio or gross notional exposure of derivatives to total equity ratio (SIFMA and Deloitte (2010)).
However, an ultimate measure of leverage in the financial system would be to include both on and off-balance sheet positions.
Complexity
This is one of the indicators that increase vulnerability to the financial shocks that …show more content…

Source: DBR (2011).
A bank will have a greater probability to distress in a global basis given that the institution engages in more cross-border activities. The BCBS (2011) note that the crossjurisdictional claims uses data that active banks report to the central bank in their home jurisdiction. These claims includes either balances and deposits placed with different banks or advances and loans to both banks and non-banks. On the other hand, the cross-jurisdictional liabilities use data that active banks report to the BIS.
According to the BCBS (2011), the score of each banks cross-jurisdictional claims is obtained by dividing the amount of claims which that bank holds by the the total claims of all institutions in the sample while the score of each banks cross-jurisdictional liabilities is obtained by subtracting the liabilities vis--vis related offices which that bank holds from total foreign liabilities then adding local liabilities expressed in local currency and finally expressing it as a portion of the total amount of all financial institutions in the sample.
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