The aim of the project was to, based on empirical research conducted in Europe, increase knowledge about systemic risk – that is, the risk that affects all other types of risk in financial and economic systems, and its materialization leads to financial crises. The starting point for the research was the observation that the existing measurement methods proposed for developed countries are not applicable or give unreliable results for developing and smaller developed countries. This indicated the existence of a large research gap both in the area of systemic risk modeling and in empirically studying this phenomenon in such countries.
The project’s first major achievement is the development of new models and innovations to:
- measurement of systemic liquidity risk in all (developed and developing) interbank markets,
- quantitative measurement of climate risk based on ESG indicators,
- coverage of all systemically important banks in Europe (65% more banks than previously possible),
- integrating information on the systemicness, interconnectedness, complexity, importance, and size of banks, which was not possible before,
- measurement of various previously underestimated systemic risk factors, such as the impact of the largest Western European exchanges on risk in developing countries,
- combining three aspects of systemic risk in one measurement using a proprietary model of systemic turbulence,
- creating rankings of systemically important banks based on different aspects of systemic risk.
The second achievement is the application of the novel measurement tools described in large-scale empirical research. Empirical research covered 27 European countries, i.e., Austria, Belgium, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, France, Germany, Greece, Iceland, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Norway, Poland, Romania, Russia, Spain, Slovakia, Sweden, Switzerland, Ukraine, Hungary, Great Britain. The analyzed period covered the years 2006-2022, characterized by many periods of systemic turbulence in Europe: the global financial crisis (2008-2010), the LIBOR crisis (2011-2012), the public debt crisis (2012-2014), Brexit (2016-2020 ), the COVID-19 pandemic (2020-2022), the war in Ukraine (2022). Three aspects of systemic risk were analyzed: systemic liquidity, the fragility of financial institutions, and contagion (risk spillover) in financial systems. The research results were presented in part in the doctoral dissertation and, in their entirety, in 8 international articles.
The results indicate that systemic risk in developed and developing countries has different properties. The research showed differences in the significance and course of each of the three aspects of systemic risk for analyzed systemically important banks and countries, modeling them individually, in groups, and comparatively. Liquidity, fragility, and contagion have also been shown to affect systemic risk differently in developed and developing countries. As the results show, different aspects of risk are dominant in different countries in the analyzed period.
The research also answered whether the dominant role in generating systemic risk falls to global systemically important financial institutions (G-SIBs) or local systemically important institutions (O-SIIs). Research shows that the dominant role of institutions classified by the EBA as O-SIIs applies not only to developing countries but also to the majority of developed countries. This highlights the value of modeling innovations proposed in the project, as they allow for much better capture of this impact on risk.
The research is an essential contribution to the scientific discipline of economics and finance, as it deepens the knowledge of systemic risk in financial markets and broadens the apparatus for measuring this risk. The developed innovations and new methods in econometric modeling constitute a significant contribution to the set of systemic risk measures available to the scientific community and regulators. In addition, the developed methods allowed the measurement of this risk quantitatively for many countries for which this measurement was not previously possible with the methods indicated. For other countries, they improved the quality of such measurements significantly.
The empirical analyses significantly broadened the knowledge about systemic risk, especially in developing countries. It has been shown that this risk is only partly similar to that in developed countries, for which the results of similar analyzes were presented in the literature. Several features specific to the course of this risk in its three-aspect approach in the countries of Northern and Western Europe are different than in Southern, Central, and Eastern Europe. These observations allow for a better understanding of the theoretical properties of systemic risk. They also have a measurable value for the regulators, allowing for more conscious management of this risk in the surveyed European countries to reduce the frequency and consequences of financial crises.
For detailed research results in Polish click here.