Systemic Risk in Banking: An Update

Abstract

This article provides a comprehensive analysis of systemic risk, as the primary ingredient to understand financial crises and as a main rationale for banking regulation, prudential supervision, and crisis management. The second section provides the framework within which the theoretical and empirical literature is interpreted in the subsequent parts and briefly discusses its relevance for economic policy. The third section gives an overview of theoretical models explaining systemic risks in banking markets (including payment systems). The fourth section surveys econometric tests and some other quantitative empirical assessments of the various facets of systemic risk, focusing particularly on bank contagion but also on joint crises - for example, as caused by systematic shocks or the unravelling of imbalances that have built up over time. The fifth section concludes.