Measuring Systemic Risk and Financial Linkages in the Thai Banking System

This paper addresses the measurement issues of systemic risk in the Thai banking sector. The concept of conditional value-at-risk (CoVaR), due to Adrian and Brunnermeier (2008), was used to quantify the level of systemic risk and financial linkages among six major Thai commercial banks over the period of 1996Q2-2009Q1. Intuitively, CoVaR measures the degree of ‘risk externalities' that a single institution imposes on the system. We found that there was additional risk imposed onto the overall system by individual banks, both during the Asian crisis time and in subsequent periods. There is some evidence that larger banks contribute more to this systemic risk, as measured by the concept of “ΔCoVaR,” but size is far from being a dominant factor. We further apply the concept of CoVaR to measure the financial linkage between any two banks and identify balance-sheet factors which determine such financial linkage via panel data regressions. These measures of risk externalities serve as a useful additional toolbox to the regulators, and themselves have novel regulatory implications