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

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 27 May 2022

Staff Working Paper No. 983

By Giovanni Covi, James Brookes and Charumathi Raja

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.

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

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