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BANKING & FINANCE | RESEARCH ARTICLE

Measuring systemic risk of Greek banks: New approach by using the epidemic model “SEIR”Abdelkader Derbali and Slaheddine Hallara

Cogent Business & Management (2016), 3: 1153864

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Derbali & Hallara, Cogent Business & Management (2016), 3: 1153864http://dx.doi.org/10.1080/23311975.2016.1153864

BANKING & FINANCE | RESEARCH ARTICLE

Measuring systemic risk of Greek banks: New approach by using the epidemic model “SEIR”Abdelkader Derbali1* and Slaheddine Hallara2

Abstract: In the last decade of the financial crisis of 2007, the international financial system appeared to be on the brink of a major systemic crisis which leads to a failure of a systemically important European bank. This type of scenario highlights the need for identifying and measuring of the contribution of banks to systemic risk in the financial system. Then, the aim of this paper is to propose, for the first time, a new approach to measure systemic risk in the financial institutions. This approach is based on the epidemic model methodology. Then, we use the SEIR model with four compartments: Susceptible, Exposed, Infected, and Removed. We apply this model for a sample of 18 Greek banks listed in the Athens Exchange over the period from 2 January 2006 to 31 December 2012. Based on the empirical results, we find the existence of 12 times of default transmission during the study period and the transmission of default coincides with the number of Greek banks that have declared failure and then leaving the Athens Exchange. Also, we remark that the continuation of aid and recovery plans granted by international and national regulatory authorities did enough to save Greek banks.

Subjects: Banking; Corporate Finance; Risk Management

Keywords: systemic risk; epidemic model; SEIR; Greek banks; transmission

JEL classifications: D53; E02; E44; G21; G32; C52

*Corresponding author: Abdelkader Derbali, Department of Finance, Higher Institute of Management of Sousse, University of Sousse, 22 Street Zarkaa Al Yamama, Sousse Erriadh 4023, Tunisia E-mail: derbaliabdelkader@outlook.fr

Reviewing editor:David McMillan, University of Stirling, UK

Additional information is available at the end of the article

ABOUT THE AUTHORSAbdelkader Derbali is an assistant professor in Finance at the Higher Institute of Management of Sousse in University of Sousse, Tunisia. He is one of the editorial board members in the African Journal of Accounting, Auditing and Finance. His research interests include Risk Management and Capital markets and institutions. He has published articles, among others, in Research in International Business and Finance, The Journal of Energy Markets, African Journal of Accounting, Auditing and Finance, International Journal of Critical Accounting, and International Journal of Trade and Global Market.

Slaheddina Hallara is a professor of Finance at Higher Institute of Management of Tunis in University of Tunis, Tunisia. His research interests are pricing, credit risk, and financial markets. He obtained his PhD in Finance from Rennes University, Tunisia. His research has been published in journals such as Research in International Business and Finance, International Journal of Monetary Economics and Finance.

PUBLIC INTEREST STATEMENTThis paper analyzes the propagation of the default in the Greek financial system. This propagation justifies the presence of the systemic risk in Greece. So, this study is important because, after the outbreak of the financial crisis of 2007, the task of processing bank failures and its negative impact requires approaches to assess systemic risk and to determinate the role of Greek regulators. Thus, we find the existence of 12 transmissions of default during the period of study (02/01/2006–31/12/2012). Then, the role of the central bank is inadequate and even absent for the period of study. There is a deficiency in own regulations. Also, we find that the default probability, the recovery rate, the default correlation, the exposure at default, the frequency of default in the case of loss, the market capitalization, and the regulatory authorities are the main factors of the systemic risk in the financial system of Greece.

Received: 25 December 2015Accepted: 10 February 2016

© 2016 The Author(s). This open access article is distributed under a Creative Commons Attribution (CC-BY) 4.0 license.

Page 2 of 31

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Derbali & Hallara, Cogent Business & Management (2016), 3: 1153864http://dx.doi.org/10.1080/23311975.2016.1153864

Brownlees and Engle (2012) proposed an approach to determine the systemic risk. This approach is denoted SRISK measures which is used to identify the contribution of a financial institution to systemic risk on the whole financial system. Brownlees and Engle (2012) used a sample into four groups of US firms that have a market capitalization more than 5 billion dollars at the end of June 2007. The four groups are: repositories (29 institutions), brokers (32 institutions), companies insur-ance (10 institutions), and non-depository institutions (23 institutions). The period of study is from 3 June 2000 to 30 June 2010. Their results demonstrate that the companies with the highest SRISK have a strong contribution to the under-capitalization of the financial market crisis. These compa-nies are considered to be the most systemically risky.

Acharya, Engle, and Richardson (2012), Acharya, Pedersen, Philippon, and Richardson (2010), and Acharya et al. (2009) proposed a model for measuring the systemic risk. This approach is named the Systemic Expected Shortfall (SES) or the expected systemic failure. Acharya et al. (2009, 2010, 2012) used a sample of 102 American financial institutions into 4 groups during a period of one year (June 2006–June 2007). They utilize the Expected Shortfall to estimate the systemic risk. Acharya et al. (2009, 2010, 2012) demonstrated the importance of the level of indebtedness of firms in their con-tributions to systemic risk.

Gray and Jobst (2010, 2011) developed a model called the systemic Contingent Claims Analysis (CCA). They used a sample of 36 largest institutions in the USA divided into 4 groups: investment banks, commercial banks, insurance companies, and specialized financial institutions. The period of study began on 1 January 2007 and ended on 31 January 2010. Their results show that the magni-tude of systemic risk depends on the size of companies and on their interconnections in a multivari-ate system.

Derbali, Hallara, and Sy (2015) employed a conditional approach to estimate the systemic risk which allows decomposing the risk of the aggregate financial system of Greece. They employed the SRISK index to assess the systemic risk contribution of each Greek bank.

3. The modeling approach

3.1. The initial forma of model “SEIR”In this paper, we adopt the epidemic model “SEIR” for the measurement of the systemic risk. The SEIR model consists of four compartments (Figure 1). This model is presented in the form of differ-ential equations which measures the transfers between the four compartments (S, E, I, and R) (Al-Sheikh, 2012; Zhou & Cui, 2011):

This is the fraction of initially defaulted banks. E is the value of banks exposed to default (Exposed). This is the fraction of the banks that are infected but not yet capable of transmitting the default to the infected banks. I is the value of the banks not exposed to default (Infected). This is the portion of the banks may become in default if they are in contact with the portfolios that initially are defaulted. R is the value of banks resistant or withdrawn (Removed). This is the portion of the credit portfolios immunized against default. These are honest portfolios that do not change regardless of the situa-tion they may find themselves. � is the mean recovery rate (RR). β is the mean default correlation (DC). � is the mean probability of default (PD). � is the mean exposure at default (EAD). � is the

Figure 1. The SEIR model.

Notes: P is the total value of banks (P = S + E + I + R), S is the value of susceptible banks (susceptible).

S E I R

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Derbali & Hallara, Cogent Business & Management (2016), 3: 1153864http://dx.doi.org/10.1080/23311975.2016.1153864

The role of the central bank is inadequate and even absent for the period of study. There is a deficiency in own regulations. We note that seven years are sufficient for 40% of the sample (7 banks) that de-clared their failure and left the stock market in Greece. Thus, two major observations are necessary: strong regulation is not always synonymous with financial stability and improving the transparency of information should be at the heart of any regulatory reform to prevent systemic risks that may arise from the traditional banking industry. The regulatory authorities are required to restore the new micro-prudential and macro-prudential reforms to control and to manage the systemic risk.

Figure 18. The Greek debt.

2005/09/05

2006/03/24

2006/10/10

2007/04/28

2007/11/14

2008/06/01

2008/12/18

2009/07/06

2010/01/22

2010/08/10

2011/02/26

2011/09/14

2012/04/01

2012/10/18

2013/05/06

-4

-2

0

2

4

6

8

10

12

AcknowledgmentsThe authors would like to thank the editor and anonymous reviewers for their supportive comments and suggestions.

FundingThe authors received no direct funding for this research.

Author detailsAbdelkader Derbali1

E-mail: derbaliabdelkader@outlook.frSlaheddine Hallara2

E-mail: ihet@gnet.tn1 Department of Finance, Higher Institute of Management of

Sousse, University of Sousse, 22 Street Zarkaa Al Yamama, Sousse Erriadh 4023, Tunisia.

2 Department of Finance, Higher Institute of Management of Tunis, University of Tunis, Tunis, Tunisia.

Citation informationCite this article as: Measuring systemic risk of Greek banks: New approach by using the epidemic model “SEIR”, Abdelkader Derbali & Slaheddine Hallara, Cogent Business & Management (2016), 3: 1153864.

Cover imageSource: The Latsis Symposium of ETH Zurich (2012). https://storage.sg.ethz.ch/Latsis_2012/main/main.html.

ReferencesAcharya, V. V., Engle, R., & Richardson, M. (2012). Capital

shortfall: A new approach to ranking and regulating systemic risks. American Economic Review, 102, 59–64. http://dx.doi.org/10.1257/aer.102.3.59

Acharya, V. V., Pedersen, L. H., Philippon, T., & Richardson, M. P. (2009). Regulating systemic risk. Financial Markets, Institutions & Instruments, 18, 174–175.

Acharya, V. V., Pedersen, L. H., Philippon, T., & Richardson, M. P. (2010). Measuring systemic risk. Federal Reserve Bank of Cleveland, Working Paper, No. 10-02.

Adrian, T., & Brunnermeier, M. K. (2008). CoVaR (Staff Reports 348). Federal Reserve Bank of New York.

Adrian, T., & Brunnermeie, M. K. (2009). CoVaR (Working Paper Staff Reports No. 348). Princeton University and Federal Reserve Bank of New York.

Al-Sheikh, S. A. (2012). Modeling and analysis of an SEIR epidemic model with a limited resource for treatment. Global Journal of Science Frontier Research Mathematics and Decision Sciences, 12, 56–66.

Amelia, P., & Philip, A. S. (2013). Bank size and systemic risk. European Financial Management, 19, 429–451.

Basel Committee on Banking Supervision. (2006). Basel II: International convergence of capital measurement and capital standard. Bank for International Settlements Press & Communications CH-4002 Basel.

Bellotti, T., & Crook, J. (2012). Loss given default models incorporating macroeconomic variables for credit cards.

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