The Measurement and Monitoring of the Systemically Important Financial Institutions in SEACEN Economies

The global financial crisis of 2008-09 struck the modern capitalist system like no other in recent history. It affected many countries and markets around the world, leading to global recession in 2009. Financial institutions played a key role in the evolution of the global financial crisis. Disproportionate risks taken by big financial institutions have, over time, caused serious challenges for the whole financial system. News about the problems of a major bank led investors to flee the stocks of that bank first, followed by the stocks of other banks in the economy. Furthermore, depending on the size of the banking system and its financial connectedness with banks in other economies, news about the troubles of the banking system in a single economy forced investors to flee from banking sector stocks, not only in that economy, but in other economies of the region as well. In view of this, banking stocks are connected not only within one economy but across economies. Financial centers around the world were affected from the US and European financial crises. The SEACEN region was no exception. This study applied the Diebold-Yilmaz Connectedness Index methodology to major SEACEN bank stock return volatilities to analyze the bank volatility connectedness in the region during the period from 2004 to 2016. The results provide important insights into the behavior of the region’s major bank stocks over time. First, economy-level clusters in the banking volatility network are identified. Second, the volatility connectedness of the SEACEN banks increased significantly when the US and European financial crises hit the worldwide financial markets. During systemic events, the region’s bank volatility network becomes tighter with banks from different economies of the region generating volatility connectedness to others. When included in the analysis, along with the major Australian and Japanese banks, the global systemically important banks (GSIBs) from the US and Europe generate substantial volatility connectedness to SEACEN banks.