Smaller banks are also important when assessing systemic risk in the banking sector
News, Staff memo The market-based systemic risk measure SRISK is used to estimate banks' expected capital shortfalls in a crisis. For the first time, the calculations include all Swedish banks. The results show that the major banks account for most of the capital shortfall, but that smaller banks can also play a role if several were to experience problems at the same time, according to an analysis by Dominika Krygier and Jieying Li of the Riksbank's Financial Stability Department.
Various types of measurement can be used to make an assessment of systemic risk in the banking sector. One of these is the market-based systemic risk measure SRISK. This measure calculates a bank's expected capital shortfall in the event of a crisis. According to this method, the bank with the largest capital shortfall in a crisis is considered the most systemically important institution. The calculation is based on information about the bank's size, indebtedness and the sensitivity of its share price to market movements.
For Swedish banks, the SRISK calculation shows that the expected capital shortfall is primarily driven by the major banks, while smaller banks on average have small or no shortfalls. However, if the capital shortfall is related to banks' total assets, some smaller banks, especially consumer credit banks, show larger capital shortfalls compared with larger banks. The results support the view that even smaller banks can play a role in the course of events in a crisis. If several such banks experience problems at the same time, this could lead to a loss of market confidence and higher funding costs across the banking sector.
The fact that the measure is market-based means that it is partly or fully based on information from stock market prices. Therefore, estimating SRISK requires that the banks in question are listed on the stock exchange. In Sweden, only a small proportion of banks are listed on the stock exchange, which means that it is not possible to apply the market-based measures directly. This Staff memo therefore uses a methodology that allows the unlisted banks to be included in the analysis. In simple terms, the method involves estimating the relationship between the listed banks' SRISK and various balance sheet variables and applying it to the unlisted banks. Overall, the analysis helps to provide a more comprehensive picture of systemic risk in the Swedish banking sector.