Systemic risk and interconnectedness in Gulf Cooperation Council banking systems

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Nowadays, financial interconnectedness is the main driver of systemic risk. Thus, there is a constant need for tools to assess and manage systemic risk. This paper offers an alternative model framework to measure systemic risk and examine interconnectedness between direct exposures across banking systems in the emerging markets of the Gulf Cooperation Council (GCC). To ensure consistency and efficiency of systemic risk estimates and to capture its multifaceted nature, the methodology measures systemic risk using a combination of Filtered Historical Simulation and nonparametric regression and then examines the interconnectedness using a network analysis. The results reveal that shocks originating in the banking systems in Saudi Arabia may potentially cause a cascade of failures in the banking systems of most GCC countries. The banking system in Oman, however, is robust enough to withstand any ripple effect from adverse shocks affecting GCC’s major banking systems. Such results present some policy implications for regulators and supervisors and may benefit asset managers and investors in making portfolio allocation decisions.

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    • Figure 1. Partial correlation network
    • Table 1. Descriptive statistics for GCC banking portfolio daily returns
    • Table 2. Estimation results
    • Table 3. ∆CoVaR at the 5% confidence level for each country’s banking system at the 5% confidence level for each country’s banking system
    • Table 4. Rank concentration ratio of banking systems
    • Conceptualization
      Ramzi Nekhili
    • Data curation
      Ramzi Nekhili
    • Formal Analysis
      Ramzi Nekhili
    • Investigation
      Ramzi Nekhili
    • Methodology
      Ramzi Nekhili
    • Validation
      Ramzi Nekhili
    • Writing – original draft
      Ramzi Nekhili
    • Writing – review & editing
      Ramzi Nekhili