Structural systemic risk: evolution and main drivers

Nuno Azevedo and Vitor Oliveira

Abstract

This paper analyzes how systemic risk structurally evolved between 2007 and 2017. The main contributions of the paper to the literature include the methodology, analysis and potential use for macroprudential policies. The methodology, known as network analysis, comprises direct (credit and liquidity risk) and indirect (concentration risk) contagion channels as well as other specificities that improve the methodologies exploited so far in the literature. Using a consolidated sample, which varies between 14 and 17 banks over the period 2007–17, we show that the structural systemic risk of the Portuguese banking system reduced between 2007 and 2017. Further, in line with most of the literature, this paper highlights that direct contagion is not significant compared with contagion that stems from banks’ common exposures to asset classes. Finally, this paper supports the role played by capital in mitigating structural systemic risk, and the model behind the analysis can be used to perform stress tests with a macroprudential dimension as well as to calibrate structural capital buffers such as the other systemically important institutions and systemic risk buffers.