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A Component Expected Shortfall Approach to Systemic Risk: An Application in the South African Financial Industry

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  • Mathias Mandla Manguzvane

    (School of Economics, University of Johannesburg, Auckland Park 2092, South Africa)

  • Sibusiso Blessing Ngobese

    (School of Economics, University of Johannesburg, Auckland Park 2092, South Africa)

Abstract

The accelerated growth and interconnectedness of financial institutions and movement towards products and activities outside the regulatory purview have been met with huge concerns. South Africa is one of the emerging economies that this conundrum has beset. Any potential instability in the financial sector likely poses insurmountable consequences and unprecedented government intervention, especially given that the country currently has no deposit insurance scheme. Although it is easy to justify the channels through which banks contribute to destabilising financial markets, it remains a controversial issue for insurers and other non-banking institutions. This study aims to empirically quantify the contribution of banks and insurers to aggregate the systemic risk of their respective industries by employing the component expected shortfall (CES). The CES is a robust quantitative systemic risk measure that allows for a comprehensive assessment of systemic risk by considering the contributions of individual financial components. Our findings demonstrate that the rankings from the CES framework are closely aligned with the regulatory D-SIB surcharges of the banking entities included in the study. The close alignment of both approaches is primarily due to the consideration of the size of an institution, amongst other factors.

Suggested Citation

  • Mathias Mandla Manguzvane & Sibusiso Blessing Ngobese, 2023. "A Component Expected Shortfall Approach to Systemic Risk: An Application in the South African Financial Industry," IJFS, MDPI, vol. 11(4), pages 1-14, December.
    • Handle: RePEc:gam:jijfss:v:11:y:2023:i:4:p:146-:d:1297997
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    References listed on IDEAS

    as
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    3. Christian Brownlees & Robert F. Engle, 2017. "SRISK: A Conditional Capital Shortfall Measure of Systemic Risk," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 48-79.
    4. Wang, Ze & Gao, Xiangyun & Huang, Shupei & Sun, Qingru & Chen, Zhihua & Tang, Renwu & Di, Zengru, 2022. "Measuring systemic risk contribution of global stock markets: A dynamic tail risk network approach," International Review of Financial Analysis, Elsevier, vol. 84(C).
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    6. International Monetary Fund, 2022. "South Africa: Financial Sector Assessment Program-Financial System Stability Assessment," IMF Staff Country Reports 2022/039, International Monetary Fund.
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