Systemic Risk Accounting
This paper provides a comprehensive, flexible and balance sheet consistent framework to quantify the propagation of shocks in the banking system. The framework is balance sheet consistent since it is based on fundamental accounting relationships embedded in classic inputoutput analysis, which we apply to the entire balance sheet of the banking system, allowing for a comprehensive analysis of loss dynamics. It is also both flexible and general since it allows one to quantify the effect of shocks to both bank funding and lending and to decompose the contribution of different contagion channels to the propagation and amplification of shocks. We develop economically intuitive measures to quantify the different effects. In an extension of the framework we include reaction functions of banks as well as price dynamics due to fire sales. Applying the framework to a proprietary ECB dataset which includes an interbank network of large euro area banking groups as well as their verlapping portfolios of loans and securities, we can evaluate the effect of a variety of shock types and prudential measures on loss dynamics.