Affiliations: Central Bank of Chile, Santiago, Chile
Correspondence:
[*]
Corresponding author: Diego Avanzini, Central Bank of Chile, Agustinas 1180, Santiago, Chile. Tel.: +56 2 2670 2791; E-mail:davanzini@bcentral.cl
Abstract: In recent years, data reduction techniques have gained scene in applied
economics. Following this trail, we apply and extend the use of a data
reduction technique such as principal component analysis (PCA), to assess
the degree of systemic risk in the Chilean banking system. In particular, we
address the following questions: (i) to what extent the degree of common
risk exposure in the banking system has changed over the past decades; (ii)
during which periods this exposure increased the most; and (iii) based on
predefined thresholds, when this commonality has become systemically
relevant. Additionally, we identify systemically important financial
institutions (SIFIs) based on their contribution to the degree of common
risk exposure during periods of higher systemic risk. We find that prior to
the 2008-09 global financial crisis the degree of common risk exposure in
Chile increased significantly, and that the banks that contributed the most
were not necessarily the biggest ones in size, as measured by their assets
share.
Keywords: Common risk exposure, systemic risk, principal component analysis, financial stability, accounting data, SIFIs
