Effect of banking and macroeconomic variables on systemic risk: An application of ΔCOVAR for an emerging economy

This article examines systemic risk in the Brazilian banking sector, paying specific attention to the role of accounting and macroeconomic variables in shaping systemic risk. Based on data for the period from 2011 to 2015, we perform an analysis in two steps. In the first step, we measure the systemic risk in Brazil based on ΔCoVaR framework. In the second step, we present empirical evidence from a panel data analysis regarding the determinants (banking and macroeconomic variables) of the systemic risk. The findings denote that the systemic risk measured using the ΔCoVaR methodology is consistent with the main events contained in the Financial Stability Reports issued by the Central Bank of Brazil. Furthermore, the empirical evidence highlights the importance of bank liquidity, profitability, leverage, and interest rate in determining systemic risk. One implication of this analysis is that prudential regulation policy must be coordinated with monetary policy in order to mitigate the systemic risk.