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Measuring Capital at Risk in the UK banking sector: a microstructural network approach

Author

Listed:
  • Covi, Giovanni

    (Bank of England)

  • Brookes, James

    (Bank of England)

  • Raja, Charumathi

    (Bank of England)

Abstract

In this paper we construct and analyse the UK banking system’s Global Network of granular exposures which captures roughly 90% of the UK banking system’s total assets for the period 2018 Q1 to 2021 Q4. We thus study the microstructure of UK banking system focusing on the role played by concentration risk and interconnectedness across sectors. We then estimate the quarterly evolution of expected losses (Capital at Risk) for the UK banking sector, and via Monte Carlo simulations the stochastic distribution of UK banks’ losses to study the severity and likelihood of tail-events (Conditional Capital at Risk). In the end, we provide insights on the impact of the Covid-19 pandemic on UK banking system’s loss distribution by decomposing the sources of average and tail risks.

Suggested Citation

  • Covi, Giovanni & Brookes, James & Raja, Charumathi, 2022. "Measuring Capital at Risk in the UK banking sector: a microstructural network approach," Bank of England working papers 983, Bank of England.
    • Handle: RePEc:boe:boeewp:0983
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    References listed on IDEAS

    as
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    Cited by:

    1. David Aikman & Daniel Beale & Adam Brinley-Codd & Anne-Caroline Hüser & Giovanni Covi & Caterina Lepore, 2023. "Macro-Prudential Stress Test Models: A Survey," IMF Working Papers 2023/173, International Monetary Fund.
    2. Bahaj, Saleem & Czech, Robert & Ding, Sitong & Reis, Ricardo, 2023. "The market for inflation risk," Bank of England working papers 1028, Bank of England.

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    More about this item

    Keywords

    Financial network; systemic risk; stress testing; Covid-19 pandemic.;
    All these keywords.

    JEL classification:

    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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