The amount European governments would need to inject into the region’s banking system in the event of a financial crisis – defined as a 40% semi-annualized fall in global stock markets – dropped from €1.23 trillion to €1.122 trillion between end-March and end-June, according to a European systemic risk index from the Centre for Risk Management at Lausanne (CRML).
Using methodology developed in collaboration with the well-known and influential New York University Stern’s Volatility Institute, run by NYU professor Leonard Stern and Nobel laureate Robert Engle, the index gauges large European banks’ systemic risk by measuring size, leverage and exposure to global equity market shocks.
The dynamic index, updated monthly, reveals that, as of end-June, the systemic risk posed by Greek lenders had halved from €27 billion at the end of March to just €13 billion, followed by a fall in systemic risk in the UK and the Netherlands of 12% and 13%, respectively.
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The index is designed to provide a transparent early-warning system to gauge the expected loss of systemic financial firms during global crises. According to the study, the dramatic fall in Greek system risk (SRISK) has been driven by the dramatic, enforced consolidation of the banking system and deleveraging. The index notes that the National Bank of Greece poses no tangible systemic risk, in the event of a global stress test across public equity markets, thanks to the €9.7 billion increase in its capital base from private investors, while Piraeus Bank saw a massive reduction in leverage, according to the index, from 350% to 10% and an increase in its market capitalization from a low of just €200 million to €6.2 billion in July. Meanwhile, Alpha Bank’s deleveraging and its acquisition of Emporiki Bank served to reduce its SRISK score from €2.8 billion to €0.8 billion between the end of March and end-June.
By contrast, France continues to pose the biggest threat to European financial risk, according to the index, with the French government “liable to have to find at least €300 billion to prop up its banks in the event of a financial crash”.
Professor Michael Rockinger of the Centre for Risk Management at HEC Lausanne (CRML) says: “The Mediterranean countries demonstrate that if a will exists to decrease system risk, it can be done. It seems that Greek banks are doing the right thing to return to the 'path of virtue'.
“The same cannot be said for Crédit Agricole, which remains the single most exposed institution in Europe in terms of SRISK (€89.4 billion), marginally worse than Deutsche Bank (€89.3 billion). Barclays (SRISK at €76.1 billion) and BNP Paribas (€74.4 billion) which comprise the rest of the top-four riskiest European financial institutions.
“However, Deutsche Bank has announced plans to reduce its workforce by some 10% and downsize its activities, which will improve its systemic risk ranking.”
More information on the methodology can be found on CRML's website.