Abstract
This study empirically analyzes systemic risk in the South African banking sector with the aim of identifying the systemically important banks. To this end, Adrian and Brunnermeier’s (2008) Conditional Value at Risk (CoVaR) approach has been employed to measure systemic risk in the South African banking sector. To measure the marginal contributions of individual banks to systemic risk, the delta CoVaR (ΔCoVaR) was calculated, which is the difference between CoVaR when individual banks are in a normal state and CoVaR when they are in distress. Kupiec’s (1995) coverage test to back test the Value at Risk (VaR) models was also employed. The period 19 June 2007 to 11 April 2016 was covered, using daily stock market prices for six banks. The findings indicate that the two largest banks, namely First Rand Bank and Standard Bank, are the highest contributors to systemic risk, while the smallest bank, namely African Bank, contributes least. Another interesting observation is that the contribution of banks to systemic risk tends to increase during times of financial crises. Moreover, the results show that the information contained in the VaR is different from that in delta CoVaR, hence raising a need for regulators to go beyond idiosyncratic measures such VaR if systemic risk is to be curbed. Thus there is a need to go beyond micro prudential regulation if soundness and stability are to be attained.
M.Com. (Financial Economics)