• University of New South Wales
  • Macquarie University
  • The University of Sydney
  • University of Technology Sydney
  • Australian National University
  • The University of Melbourne
  • Capital Markets
  • Sirca
  • Commonwealth Bank
  • KPMG
  • King & Wood Mallesons
  • Macquarie
  • Australian Government - Treasury
  • New South Wales Goverment

CIFR Research Project

Detecting Systemically Important Risk - E102
Area of Interest: Systemic Risk, Completed Projects  Lead Institution: University of Tasmania
Assessment Round: November 2012  Completion Date: 2015
Project Summary

Two critical issues emerging from the recent financial crisis are the importance of systemic risk and links between the financial sector and the real economy. Detecting and measuring systemic risk presents significant problems for regulators and policymakers.


The research aimed to:
(i) Develop a measure of systemic risk which captures both the interconnections and the changing strength of these relationships over time.
(ii) Address which groups of institutions and sectors are relevant to the assessment of systemic risk and the effectiveness of regulatory policy designed to mitigate it during crisis conditions.
(iii) Identify the relationship between banking and sovereign debt on a global scale in a network approach to systemic risk.


Project Outcome
The research found that the linkages between the banking sector and other participants in both the financial sector and the real economy are vital in the assessment of systemic risk.

The linkages which provide feedback effects from the real economy to the financial sector may substantially alter the measured systemic risk - often amplifying it during a crisis and dampening it during other periods.
This measure of systemic risk via interconnectedness highlights the effectiveness of policies aimed at breaking the amplification mechanisms during crisis, such as intervention programs like the US Troubled Asset Relief Program, which are not evident as circuit breakers in models where systemic risk is measured by capital adequacy.

By expanding the set of financial institutions under consideration, the research found that the second most systemically risky sector in the economy is the insurance sector. This supports the debate for the regulation of insurers as the research demonstrated that the sector forms a readily identifiable second level of systemic risk, possibly through insurers’ expansion into non-traditional insurance products.


Furthermore, in the case of Australia , where the commodities boom has played an important role in the economy over the past 15 years, the minerals sector is shown to have a level of systemic risk that is second only to the financial sector. This large, dominant sector of the economy becomes identifiably risky as the boom progresses.

Finally, the research found that the existence of an integrated network between financial institutions and sovereigns reduces the probability of a default within either of these areas.

These findings support the 'robust-but-fragile' model of the financial sector, whereby the network is highly resilient, but only up to a point. Thereafter, it may transmit and amplify shocks in an undesirable manner, proving that clarity in understanding the type of shock responsible for triggering a crisis event is important.


This research has been presented at over 25 international and domestic seminar and conferences including:

Indices of Riskiness and New Risk Measures Workshop
Zurich (March 2013)
Deutsche Bundesbank & European Central Bank
Frankfurt (May 2013)
54th New Zealand Association of Economists Annual Conference
Wellington (July 2013)
Sydney (August 2013)
7th International Workshop Methods in International Finance Network (MIFN)
Belgium (September 2013)
ESSEC Business School
Paris (November 2013)
Stockholm School of Economics
Stockholm (April2014)
Koç University
Istanbul (May 2014)

Universidad Carolos III de Madrid
Madrid (June 2014)
CIFR WORKSHOP: Financial System Inquiry II
Sydney (August 2014)
Financial Crises: Transmission and Recovery – National University of Ireland
Maynooth (September 2014)
5th CEQURA Conference on Advances in Financial and Insurance Risk Management
Germany (October 2014)
11th International Conference Western Economic Association International
Wellington (January 2015)
Vlerick Business School
Ghent, Belgium (February 2015)
Lancaster University Management School
London (February 2015)
Maastricht University
Netherland (April 2015)
IESEG School of Management
France (April 2015)
The University of Manchester
UK (May 2015)
Centre for Applied Macro-Finance & York Econometrics Workshop 2015
UK (May 2015)
2016 Australasia Meeting of the Econometric Society
Sydney (July 2016)

3rd Annual Asset Allocation 2016 Conference
Sydney (July 2016)


Team Leader:
Professor Mardi Dungey | Associate Dean of Research, Faculty of Business, University of Tasmania
Dr Matteo Luciani | Post-Doctoral Researcher, European Centre for Advanced Research in Economics and Statistics, Solvay Brussels School of Economics and Management, Université libre de Bruxelles
Professor David Veredas | Professor, Director Quantitative Finance Group, Solvay Brussels School of Economics and Management, Université libre de Bruxelles
Project Outputs:


The Centre for International Finance and Regulation (CIFR) represents a strategic link between academia, financial regulators, policy makers and industry, promoting financial sector vibrancy, resiliency and integrity, through leading research and education.

CIFR receives funding and support from the Commonwealth and NSW Governments, and its industry, university and research centre partners.



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