Bank risk

MacroVar monitors bank risk by monitoring credit default swap indices of systemic banks and insurance companies in the United States, Europe and UK.

Bank risk model

Bank risk is the likelihood that a government goes bankrupt and the amount the investor loses if it happens. Credit-risky securities include bank bonds. Credit default swaps are widely used derivatives used in credit risk management to describe market perceptions of credit risk for a specific financial institute. Credit default swaps (CDS) are derivatives contracts which by construction aim at quantifying the risk of default of a counterparty. Therefore, CDS written for banks are early signals to monitor and detect elevated credit risk conditions for these banks and as a consequence for the global financial system.

MacroVar calculates for each of the banks credit default swaps the average of the six month and twelve month z-scores. Extreme values of z-scores greater than two indicate elevated credit risk conditions and vice-versa. MacroVar bank risk index is the average of z-scores of the tweleve credit default swaps tracked.