Measuring Systemic Risk in the

Financial Sector in Denmark

by
Emil Nolse Leifsson

Masters Thesis
Master of Science in Advanced Economics and Finance
(Cand. Oecon)
Copenhagen Business School (CBS)
Supervisor: Mads Stenbo Nielsen, Department of Finance (CBS)
September 2013
Number of pages (characters): 80 (174.719)

__________________________________________________________________________________
(Emil Nolse Leifsson)

Executive summary
This thesis presents an alternative approach that regulators can apply when measuring
systemic risk. Instead of applying the more traditional bottom-up approach which seeks to
ensure the robustness of the individual financial institutions this thesis applies a top-down
approach that takes into account the interconnectedness of the financial institutions as well as
their financial robustness. By applying a top-down approach this thesis looks to measure
systemic risk as the propensity of a financial institution to be under-capitalized when the
financial system as a whole is under-capitalized. The methodological approach used in this
thesis is inspired by (Acharya, et al., 2010) and (Brownless & Engle, 2012), where certain
modifications have been necessary in order to measure systemic risk in the financial sector in
Denmark. Also, in order to take into account the possibility of capital savings and outside
funding the model has been further extended.
As a concrete case study this thesis measures systemic risk in the financial sector in Denmark
during the time period 2006-2013. The systemic risk level is found to peak in 2011 reaching
an estimated level of 624 billion DKK. Today (end of 2013), the systemic risk level is
estimated to be 413 billion DKK, corresponding to roughly one-fifth of the annual GDP in
Denmark. Even though the systemic risk level has decreased over the recent years it is still
found to be approximately twice as large as it was before the 2007-2009 financial crisis. This
case study holds 60 financial institutions that are still active or have been at some point
during the time period considered.
This thesis makes the following recommendations on how systemic risk can be reduced.
Firstly, the leverage ratio of the financial institutions generally needs to be lowered through
stricter capital requirement. Secondly, the capital requirements should be imposed by
applying a non-uniform approach where larger and more interconnected financial institutions
are given stricter capital requirements. Lastly, a countercyclical capital buffer should be
imposed that forces financial institutions to put aside capital in good times to help withstand
the financial pressure during bad times. The size of the countercyclical capital buffer should
also be increased for larger and more interconnected financial institutions.

Table of contents
1

Introduction ........................................................................................................................................................ 1
1.1

Research questions .................................................................................................................................. 4

1.2

Limitations and delimitations.............................................................................................................. 6

1.3

Literature review ...................................................................................................................................... 6

Theory ................................................................................................................................................................... 8
2.1

Value-at-Risk (VaR) ................................................................................................................................. 9

2.2

Expected shortfall (ES) .........................................................................................................................11

2.2.1

2.3

Systemic expected shortfall (SES) ....................................................................................................14

2.4

The systemic risk index (SRISK) .......................................................................................................19

Methodology .....................................................................................................................................................20
3.1

Time horizons ..........................................................................................................................................22

3.2

Description of data .................................................................................................................................23

3.2.1

MES, RSES and RSESmax ................................................................................................................26

3.2.2

Including financial institutions from Norway and Sweden ...........................................31

3.2.3

Market indices .................................................................................................................................32

MES analysis .....................................................................................................................................................33

4.1

The case of only Danish financial institutions .............................................................................33

4.2

Including financial institutions from Norway and Sweden ....................................................35

4.3

Extending the crisis period .................................................................................................................36

4.4

Using weekly data...................................................................................................................................41

4.4.1
5

Marginal expected shortfall (MES) ..........................................................................................12

Weighted scheme exponentially declining weights (EWMA) ....................................43

Measuring systemic risk ..............................................................................................................................48

5.1

Validity of SRISK ......................................................................................................................................52

5.2

RSRISK and RSRISK%.............................................................................................................................56

Implementation and discussion ................................................................................................................61

6.1

Estimating the minimum level of capital .......................................................................................62

6.2

Changing the minimum capital requirement (k)........................................................................64

6.3

Extension of the model taking into account omitted relevant factors ...........................69

Conclusion .........................................................................................................................................................78

Appendix ............................................................................................................................................................81
8.1

Interconnectedness of the global market the contagion effect .........................................81

8.2

Coherent risk measures .......................................................................................................................83

8.3

Converting MES to LRMES ...................................................................................................................84

8.4

Special case: Nykredit ...........................................................................................................................86

8.5

Pre-crisis: Financial institutions included in the analysis ......................................................89

8.6

Proof of RSESmax formula .....................................................................................................................92

8.7

Leverage ratio - LVG ..............................................................................................................................94

8.8

Summary statistics including financial institutions from Norway and Sweden .........95

8.9

2007-2009 financial crisis in Denmark..........................................................................................96

8.10

MES analysis - regression output table ......................................................................................96

8.11

Average daily volume Nasdaq OMX ............................................................................................97

8.12

Volume group allocation .................................................................................................................97

8.13

Weekly data analysis.........................................................................................................................98

8.14

Exponential weighted moving average model (EWMA)................................................... 100

8.14.1 Weighted scheme algorithm ................................................................................................... 100

8.14.2 Illustrative examples of s effect ......................................................................................... 102
8.14.3 Illustrative examples of omitted weight density ............................................................ 103

8.15

Scatterplot of RSESmax Q4-2009 and WMES ........................................................................... 104

8.16

Linear regression models - WMES ............................................................................................ 105

8.17

Explanatory power of other risk measures........................................................................... 106

8.18

WMES by financial institution .................................................................................................... 108

8.19

SRISK by financial institution...................................................................................................... 109

8.20

SRISK% by financial institution ................................................................................................. 110

8.21

SRISK after including SEB, DNB and Handelsbanken ........................................................ 111

8.22

Comparing total systemic risk with total GDP ..................................................................... 112

8.23

Percentage debt change for Danske Bank and Nordea ..................................................... 112

8.24

RSRISK% by financial institution............................................................................................... 113

8.25

DA_RSRISK% by financial institution ....................................................................................... 114

8.26

RSRISK for financial institution in other category .......................................................... 115

8.27

NIRO Index for financial institutions with abnormal %RSRISK .................................... 115

8.28

Ratio between actual debt-to-equity and Levmax ................................................................. 116

8.29

Computing SRISK by changing k ................................................................................................ 117

8.30

EURIBOR EONIA spread ............................................................................................................ 117

8.31

SRISK under the extended model .............................................................................................. 119

8.32

The impact of changing - an analytical approach ............................................................ 120

8.33

SRISK under the extended model .............................................................................................. 122

Bibliography .................................................................................................................................................. 124

1 Introduction
So in summary, Your Majesty, the failure to foresee the timing, extent and severity of the
crisis and to head it off, while it had many causes, was principally a failure of the
collective imagination of many bright people, both in this country and internationally, to
understand the risks to the system as a whole.
- Professor Tim Besley and Professor Peter Hennessy, FBA1
In light of the 2007-2009 financial crisis, much attention has been drawn toward the systemic
risk in our financial system. Spectators were asking how such an influential breakdown of the
system could go by unnoticed and were questioning the risk models that had been used to
assess the systemic risk of the system. During a briefing by academics at the London School of
Economics in November 2008, Queen Elizabeth famously asked the audience, How come
nobody could foresee it [the financial crisis]?
After receiving this question directly from Her Majesty a group of eminent economists,
business experts, regulators and the government structured a three-page letter explaining
how such a collapse could pass undetected without any warning signals being triggered2. The
letter stated that some economists had actually raised concerns about the condition of the
financial system, but no one had foreseen the exact timing and ferocity of what was about to
come. Even though many risk managers were in fact doing a good job at measuring individual
risk, the failure was to see how individual risk collectively can add up to a series of
interconnected risks that increases the systemic risk of the system. Reassuringly the authors
end the letter by stating that all parties would do their best in the future to avoid that a
similar failure of the financial system occurs again:

1
2

Letter to Her Majesty, Queen Elizabeth (Beasley & Hennessy, 2009)

It is estimated, that the Queen lost 25 million in the turmoil of the financial crisis (Pierce, 2008)

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Given the forecasting failure at the heart of your enquiry, the British Academy is giving some
thought to your Crown servants in the Treasury, the Cabinet Office and the Department for
Business, Innovation & Skills, as well as the Bank of England and the Financial Services Authority
might develop a new, shared horizon-scanning capability so that you never need to ask your
question again.(Beasley & Hennessy, 2009)
The interesting question then is; what do authorities and academia suggest we change to
avoid similar breakdowns of the financial system in the future? And how sure can we be, that
these changes will in fact have an impact on the risk level of the system? These are some of
the questions driving the motivation behind this thesis.
Even though the term systemic risk is widely used, it can be difficult to come up with a clear
definition that covers all aspects of this phenomenon. A useful definition is though provided
by (Hub, u.d.):
Systemic risk arises when the failure of a single entity or cluster of entities can cause a
cascading failure, due to the size and interconnectedness of institutions, which could potentially
bankrupt or bring down the entire financial system
In other words, the systemic risk of a system increases if the instability or default of one
financial institution spreads as a contagion effect to the rest of the economy. The easiest way
to think about this contagion effect is probably to compare it with the transmission of medical
diseases or the act of toppling domino pieces. Like toppling domino pieces, the default of one
financial institution can lead to the default of another financial institution, which again can
lead to the default of yet another financial institution. This sequence of default events can
easily escalate to an avalanche of defaulting financial institutions, resulting in a systemic
event, which in principle was caused by the default of the initial financial institution. In order
to properly assess the systemic risk of a system, it is therefore essential to measure how much
each financial institution contributes to the overall risk of the system. Not before this
investigation has been made is it possible to give a prediction of the overall risk level of the
system.

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The complexity of financial networks can make assessment of systemic risk a challenging task.
(Engle, et al., 2012) point out that the first indicator of systemic risk is typically based on the
size of the financial institution relative to the whole economy, while the second indicator
looks at how interconnected the financial institution is with the other financial institutions in
the system. In extreme cases the first indicator can point to financial institutions that are
known to be too big to fail, whereas the second indicator can point to financial institutions
that are considered too interconnected to fail. Both these colloquial terms are frequently
used when a governments bailout policy is discussed to point out a financial institution
whose failure would have severe consequences for the rest of the economy. A third indicator
that is relevant when assessing systemic risk is the detection of systemic events and how
likely they are to spread. Both these components can be difficult to assess and their impact is
often not truly measurable before the event has occurred. The recent 2007-2009 financial
crisis demonstrates this point well; the economic downturn begin initially in the American
housing market, but through financial instruments such as mortgage-backed securities (MBS)
and collateralized debt obligations (CDO) the crisis quickly spread to Wall Street. From here
on the crisis began to escalate, evolving into a global recession, which timing and severity was
difficult for anyone to anticipate.
In consideration of the more traditional risk tools used, this thesis presents an alternative
approach for measuring systemic risk in financial institutions. While traditional tools used by
regulators are designed to limit the individual risk of financial institutions, they are not
sufficiently focused on systemic risk even though systemic risk is often the properly rationale
behind such regulation. Ensuring the soundness of individual financial institutions does not
necessarily ensure the soundness of the system since a bottom-up approach fails to consider
the interconnections between the financial institutions that are the primary channel of
propagation of systemic risk. As a result, while individual risk may be properly dealt with in
normal times, the system itself remains fragile and exposed. Therefore, it is essential that,
beside of the financial condition of the financial institution, the interconnectedness of the
financial institution with the system as well as the initial condition of the system is taken into
consideration. Building on the definition of systemic risk that was provided earlier, systemic
risk arises when the default of a financial institution has a rippling effect on the other
financial institutions in the system. This rippling effect is especially strong if the system as a
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whole is under-capitalized. Said differently, a financial institution that is struggling while the
system is well-capitalized is much more likely to be able to raise new capital, be acquired or
face an orderly bankruptcy, and therefore is not an overly threat to the system as a whole. On
the other hand, if a financial institution is struggling while the system is under-capitalized, it
will have a difficult time finding funding as well as a potential acquirer. This situation means
that if the financial institution defaults it will have a damaging effect on the system since its
losses will have repercussions throughout the system and could lead to a systemic event.
Consequently, a financial institution is systemically risky if it has a large propensity to be
under-capitalized when the rest of the system is under-capitalized. It is based on this
rationale that systemic risk is measured in this thesis.
This thesis will proceed as follows; in the rest of this section the research questions together
with limitation and literature review will be presented. Section 2 presents the underlying
theory that has been applied to measure systemic risk. Section 3 describes the methodology
behind the thesis and gives a thorough description of the data that has been applied. Section 4
applies pre-crisis data to adjust the model such that it is tuned in on measuring systemic risk
in the financial sector in Denmark. Based on the adjustments made in Section 4, the systemic
risk level of financial institutions in Denmark is presented in section 5. Section 6
demonstrates how the model can be implemented by regulators and discusses potential
shortcomings of the model. Through this discussion an attempt is made to modify the model
such that it takes into account the relevant factors that it is believed to be missing. Section 7
concludes this thesis.

1.1 Research questions

The approach used in this thesis is inspired by methods used in the papers Volatility,
Correlation and Tails for Systemic Risk Measurement (Brownless & Engle, 2012) and
Measuring Systemic Risk (Acharya, et al., 2010). These are tools that have been developed
by researches that are connected to NYU Stern School of Business and NYU Stern Volatility

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Institute3. The data sample used to estimate these tools are all based on large financial
institutions located in the US. This thesis seeks to measure systemic risk of financial
institutions that are located in Denmark, and therefore it is not clear whether the same tools
can be applied directly when measuring systemic risk of financial institutions in Denmark. On
the contrary, it is probably more likely that the differences in market conditions will play a
significant role making it inappropriate to apply the exact same methodology. In the process
of measuring systemic risk of financial institutions in Denmark, this thesis pursues to fill out
the gap that is required in order to use the tools presented by (Brownless & Engle, 2012) and
(Acharya, et al., 2010). Furthermore, the recent financial crisis has been used as an event
study to retrospectively evaluate the performance of these risk tools making it possible to
identify any potential adjustments that can help fine-tune these risk tools. The research
questions of this thesis can be summarized as follows:

Inspired by the method used by (Brownless & Engle, 2012) and (Acharya, et al., 2010),
which adjustments are necessary in order to apply the same approach when
measuring systemic risk in the financial sector in Denmark?

Given the necessary adjustments made to the method used by (Brownless & Engle,
2012) and (Acharya, et al., 2010), what is the systemic risk level of financial
institutions in Denmark today (end of 2013)?

Which relevant factors is the model presented by (Brownless & Engle, 2012) and
(Acharya, et al., 2010) not considering, and how can these be included by modifying
the model?

How can regulators use the model and tools presented in this thesis to lower the
systemic risk of financial institutions in Denmark?

The NYU Stern Volatility Institute calculates volatilities and correlation every day on a wide range of assets
using various methods. The institute is under direction of Nobel Laureate Professor Robert Engle http://vlab.stern.nyu.edu

Page 5 of 128

1.2 Limitations and delimitations

In practice the failure of any institution in the economic network structure could potentially
pass on negative externalities to the rest of the system. Instead of considering all institutions
in the economic network, this thesis limits its self to only consider financial institutions.
Ideally, this implies that when assessing systemic risk in the financial sector one should
incorporate all financial institutions in the analysis such that a complete assessment can be
made. However, given that a large number of financial institutions operate across multiple
countries and interact with each other through a complex network structure a complete
analysis of the entire financial network is far beyond the scope of this thesis. The focus of this
thesis is therefore limited to only consider a small branch of the network which only consists
of financial institutions in Denmark. Furthermore, given that the model used in this thesis
applies stock prices as an essential input, all financial institutions that are not listed on the
stock exchange are necessarily filtered out4. This means that any systemic risk that comes
from financial institutions outside of the sample considered is not taken into account when
assessing the risk level of the system. However, since large financial institutions usually are
listed on the stock exchange, and it is it generally them that contribute with most systemic
risk, it is believed that the majority of the systemic risk in the financial sector in Denmark is
captured through the model used in this thesis.
In order to evaluate the performance of the model and present some interesting findings, the
time horizon used in this thesis is concentrated around the 2007-2009 financial crisis. More
specifically, the time horizon is narrowed down to only consider the period just prior to the
crisis event until today (i.e., from 2006 until 2013).

1.3 Literature review

The literature on systemic risk can broadly be separated into three categories. The first
category takes a structural approach using contingent claims analysis on the assets of the
financial institution (Lehar, 2005; Gray & Jobst, 2009; Gray, et al., 2008). This approach is very

This condition is at the expense of one of the larger financial institutions in Denmark, Nykredit. In an attempt to
incorporate Nykredit in the sample, the stock price of Nykredit Invest Danske Aktier has been used as a proxy for
the entire concern. Appendix 8.4 demonstrates why this approximation after all seems reasonable

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much inspired by the Merton framework were equity and debt are viewed as contingent
claims that can be used to estimate the market value of the total assets. Based on this
valuation, the systemic risk of the financial institution can be estimated. The second category
applies a reduced-form approach were the focus is on statistical tail behavior of the equity
return of the financial institution (Hartmann, et al., 2005; Huang, et al., 2009; Adrian &
Brunnermeier, 2009; Brunnermeier & Oehmke, 2012). The approach of this thesis resembles
best this approach. The final category uses a network approach to estimate the contagion
effect that arises from a default of a single financial institution or a cluster of financial
institutions (Upper & Worms, 2004; Sheldon & Maurer, 1998; Furfine, 2003). This approach is
pioneered by the simple network model presented by (Allen & Gale, 2000) and has later
developed into more complicated network structures (Battiston, et al., 2009; Cont & Moussa,
2010). The clear drawback of applying a network approach is that the researcher needs to
have some information about the bilateral exposure among the financial institutions in the
network. This data can be hard to access since it usually is highly confidential and only
something that the national bank holds. Consequently, a lot of the research done within this
field is based on simulation studies that test the resilience of the network under different
network structures (Elsinger, et al., 2006; Mistrulli, 2007; Nier, et al., 2007). Other studies
have partial information on the bilateral exposure and try to estimate the missing exposures
with a maximum entropy method (Sheldon & Maurer, 1998; Upper & Worms, 2004; Degryse
& Nguyen, 2007). One of the few studies that manage to avoid the caveat of having missing
data on bilateral exposure is (Cont, et al., 2012) that does a comprehensive analysis of the
systemic risk level in the financial sector in Brazil. One of the clear advantages with applying
the approach in category one or two is that the empirical data that is needed is publically
available. That is why the approach used in this thesis relates mostly to the approach used in
these categories, and particularly to the approach used in category two.
Turning to the literature on systemic risk in Denmark there is not much research to be found.
By applying a unique data set provided by the Danish national bank (Amundsen & Arnt, 2005)
investigate the risk of contagion in the Danish interbank market in 2004. This study finds that
the overall contagion risk in the interbank market in Denmark is very limited. However, this
conclusion needs to be taken with a grain of salt since the analysis is based on a year that was
characterized by very high earnings for the financial institutions. Through a slightly different

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study, but still related to some extent, (Rrdam, 2010) investigates the relationship between
the robustness of the financial institutions in Denmark and the composition of its customers
(which sector or industry they belong to). This investigation shows that it is worthwhile for
regulators to monitor the customer portfolio of the financial institutions in Denmark since its
composition is found to have an effect on the robustness of the financial institution.
This subsection demonstrates that there exists a vast literature on systemic risk. However,
when only considering the studies that focus on systemic risk in the financial sector in
Denmark, the literature list is found to be very short. As a result, this thesis contributes
directly to that list. Furthermore, to the knowledge of the author, the approach used in this
thesis has not been applied before on the Danish financial sector, and thus it contributes with
an alternative view on how the systemic risk level in Denmark looks like.

2 Theory
This section presents the underlying theory that is applied in the empirical part of this thesis.
In order to get a comprehensive understanding of the theoretical model that is applied, a
review of standard risk measures such as Value-at-Risk (VaR) and Expected Shortfall (ES) is
needed. This review helps to get a better understanding of the logic behind how systemic risk
can be measured and how it can be quantified using empirical data. Once this understanding
has been achieved, the underlying model for measuring systemic risk (SRISK) is presented.
In the section Implementation and discussion (section 6) the assumptions behind this model
are evaluated and challenged. Furthermore, this section presents an extension of the current
model by including relevant market factors that the current version does not consider. This
extension of the model is therefore a contribution to the existing literature and gives a new
alternative on how systemic risk can be measured.

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2.1 Value-at-Risk (VaR)

Value-at-Risk (VaR) seeks to summarize the total risk of a portfolio into one single number.
Given its simplicity, it has become widely used by corporate treasurers and fund managers as
well as by financial institutions. The purpose of the VaR measure is to estimate the maximum
loss (V) that a financial institution can potentially suffer during a defined time period (T) for a
given confidence level

(e.g. 99% confidence level). Put differently, what practitioners are

trying to ascertain with the VaR measure is the following statement:

We are

percent certain that we will not lose more than V dollars in time T. (Hull, 2010)

The variable V is the VaR of the portfolio. In this statement VaR is measured in absolute terms
since it asks, What is the maximum dollar amount we can potentially lose?. Since this thesis
works with return distributions that are measured in percentage terms, the VaR measure is
reported in percentage terms (this also holds for all the other risk measures and returns).
This, however, does not change anything when interpreting VaR5.
If it is assumed that the return distribution is normal, the left hand graph on Figure 1
illustrates graphically how VaR is found. VaR is equal to minus the return at the
percentile of the distribution. The shaded area is the amount of loss that exceeds the
confidence interval and occurs with a probability of

This can be demonstrated with an example; assume that the time horizon is one year and the confidence level
is 99%. A VaR of 2% would mean that we are 99% sure that we will not lose more than 2% over the next year.
The only difference is therefore that the potential loss amount is reported in percentage terms instead of
absolute terms, otherwise the VaR measure should be interpreted in the same way.

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Figure 1: Left: Value-at-Risk (VaR) when the return has a normal distributed. Right: Illustrating the potential drawback of
VaR

Given a defined time horizon T, VaR can be stated mathematically in the following way (where
the return is denoted as R):

2-1

For a given confidence level, , and a defined time horizon, T, equation 2-1 states that the
probability that the return is less than

is

From a regulatory point of view VaR is an attractive measure. In essence, it asks the simple
question: How bad can things get?. This is the question that most stress tests seek to
answer. However, if VaR is used as a regulation tool it can lead to undesirable results. Suppose
that the Financial Services Authority (FSA) adopts a regulation that imposes a financial
institution to have a one year

of less than 10% (this could also be in absolute terms,

say $100 million). Given these conditions the financial institution could construct their
portfolio such that there is a 99.1% chance that their annual loss is less than 10% ($100
million) and a 0.9% chance that it is 50% (say, $500 million). This financial institution is
satisfying the regulation imposed by the FSA, but is clearly taking unacceptable risks. The
right hand graph on Figure 1 illustrates this scenario graphically; VaR specifies the maximum

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loss that will occur with probability

and ignores the large loss that might happen beyond

this threshold.
This is obviously a drawback that regulators would like to avoid. One solution would be to use
the expected shortfall instead of VaR. The upcoming subsection gives a description of how the
expected shortfall is computed and how it might be beneficial to use compared to VaR.

2.2 Expected shortfall (ES)

A measure that tries to make up for the shortcomings of VaR is the expected shortfall (ES).
Instead of asking: How bad can things get? ES asks: If things do get bad, what then is the
expected loss? Since ES is conditional on the event happening, it is also referred to as
conditional VaR (CVaR), conditional tail expectation or tail VaR.
Like VaR, ES investigates the loss in the left tail of the return distribution. Whereas VaR
specifies the maximum loss that will occur with a certain probability, ES measures the
expected loss should this threshold be breached. In other words, ES is a measure for the
expected loss during time T, conditional on the loss being greater than the

)th percentile

(or greater than VaR). Denote the return as R, then the relationship between ES and VaR can
be stated as follows6:

2-2

In this thesis, ES is measured as the average return on days when the returns are lower than
the VaR threshold. Similar to (Acharya, et al., 2012) the threshold for all the risk measures in
this thesis is 5% of the worst days. This threshold, together with the simple average approach,
is, however, challenged in section 4.4.
Following the properties presented by (Artzner, et al., 1999) it can been shown that ES is a
coherent risk measure, whereas VaR is not. In particular, the subadditivity condition does not
6

As VaR, ES is denoted as a positive value representing a loss amount

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necessarily hold for VaR, which means that the VaR of a combined portfolio can be larger than
the sum of the individual VaRs in the portfolio7. Preferably, when combining two projects into
one portfolio, there should be some gain from diversification effects, which entail that the VaR
of the combined portfolio is less or the same as the sum of the individual VaRs in the portfolio.
Given this drawback, and the drawback of not considering large losses beyond the VaR
threshold, ES is preferred over VaR as a risk measure in this thesis.
Both VaR and ES are good indicators of the overall risk of a financial institution. However,
from a risk management point of view it is often beneficial to break down the overall risk into
smaller components. This breakdown can help risk managers to get an overview of which risk
components they are exposed to and how much each risk component contributes to the
overall risk. For instance, a bank might get its revenues from the trading desk, commercial
activities (e.g., interest rate on loans) and corporate solutions (e.g., M&A or IPOs). Given these
streams of revenues, the risk manager might be interested in knowing how much each of
these groups contributes to the overall risk of the bank. The overall risk of the bank can be
measured with risk measures such as VaR or ES, but these measures do not reveal how risk
sensitive the bank is toward the risk taken by the individual groups. For this purpose the
marginal expected shortfall (MES) can be used.

2.2.1 Marginal expected shortfall (MES)

In order to break down the overall risk into smaller components, consider decomposing the
total return of the financial institution, R, into the sum of each groups return, :

2-3

See appendix 8.2 for a closer description of the conditions that need to be fulfilled before a risk measure can be
considered coherent. The appendix also gives an example of when the subadditivity condition does not hold for
VaR

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The weight of each group is denoted by

and the total number of groups is n. By using this

definition of the total return, the definition of ES, given in equation 2-2, can be rewritten in the
following way:

2-4

The ES can therefore also be interpreted as the weighted average of the expected return of
each group i conditional on the return of the financial institution, R, being below the VaR
threshold. The marginal expected shortfall (MES) of group i, is the sensitivity of ES to exposure
from weight

. This expression can be found by differentiating equation 2-4 with respect to

2-5

is therefore a measure for how group is risk taking contributes to the financial
institutions overall risk. This measure is found by estimating group is loss when the financial
institution is going through a stressful period.
The fact that MES measures how much each group contributes to the overall risk of the
financial institution, can be useful when measuring systemic risk. Instead of thinking about
the individual groups as part of a financial institution, we can think of financial institutions as
being part of a financial system. In this case, ES would be a measure of the overall risk of the
system (systemic risk), while MES would be a measure of how much each financial institution
contributes to this overall risk (systemic risk). Following the definition of systemic risk given
in section 1, this measure can be used to assess how much systemic risk each financial
institution contributes with. By letting the overall return, R, consist of the return of the system
(market), MES is found for each financial institution as the expected return conditional on the

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system (market) going through a stressful period. By using stock price data and market data,
the MES measure can easily be computed and is therefore easy for regulators to consider8.
The MES uses a market based approach to assess how much systemic risk each financial
institution contributes with. More specifically, by applying market data to measure the
movement between the stock price return and the market return, conditional on the bad
market days, MES specifies how much systemic risk each financial institution contributes
with. However, the systemic risk that each financial institution could potential contribute with
depends not only on how interconnected the financial institution is with the system (market),
but also on its size and leverage condition. If the financial institution has a sufficiently large
capital buffer, it is likely to be able to absorb any shocks that might occur, and therefore any
potential losses will not spread throughout the system. On the other hand, if the financial
institution is short of capital, it might only require a small shock to push it into bankruptcy,
and from here on negative externalities can easily spread through the rest of the system.
Therefore, in order to fully measure how much systemic risk each financial institution
contributes with, market data needs to be combined with balance sheet data. By
supplementing the MES measure with balance sheet data, a broader inspection of the risk
condition of the financial institutions is performed. Through these insights it is possible to
determine the systemic risk profile of each financial institution and thereafter measure the
overall systemic risk of the system. The underlying model that links the financial condition of
the financial institution with its interconnectedness with the system (market) is presented in
the next section.

2.3 Systemic expected shortfall (SES)

In order to see how the MES measure is linked with the financial condition of the financial
institution consider first the working capital of financial institution i at time t:

2-6

See section 3.2.1 for a practical description of how MES is computed

Page 14 of 128

and

denote respectively the book value of debt and the market value of equity (market

capitalization). This breakdown represents the total assets of the financial institution. The
variable k represents the fraction of assets that regulators or management set as the
minimum target level that needs to be surpassed in order to fulfil the minimum capital
requirements. Following the Basel Accords this variable could be set somewhere in the range
of 8% to 12%.
Equation 2-6 states that financial institution i has positive working capital at time t if its
market value of equity exceeds the minimum target level. If this is the case the financial
institution works properly and no negative externalities are spread to the rest of the system.
On the other hand, if the market value of equity is so low that the minimum target level
exceeds it, then the financial institution is short of capital and possible negative externalities
could spread to the rest of the system. If this occurs while the rest of the system is in distress,
the damaging effects are likely to be much more severe, and this could potentially develop
into a systemic event. Thus, in order to measure how much systemic risk the financial
institution could potentially contribute with, it is necessary to estimate the expected capital
shortage in cases where the overall system is in distress. Following the notation used by
(Acharya, et al., 2010) the expected capital shortage, conditional on the market going through
a stressful period, is denoted as the systemic expected shortfall (SES). This means that

is

the expected amount that financial institution is market value drops below the minimum
target level in cases where the system goes through a stressful period. Denote

the return

of the market and define a systemic event as one where the market return is below a certain
threshold C (i.e.,

is a systemic event). The

for financial institution i at time t can

then be stated as:

2-7

Page 15 of 128

Assume, in the case of a systemic event, that the debt value

implies that

, cannot be renegotiated. This

, and therefore equation 2-7 can be rewritten as:

2-8

The

measure is therefore a function of the share of minimum asset level, k, the debt level,

and the expected equity value given that a systemic event is taking place,

This last expression can be difficult to estimate, since it can only truly be measured once the
systemic event is taking place. From a regulatory or risk management point of view it is
usually too late to act once the systemic event has been triggered. At that point the crisis has
already hit, and from there on it is a matter of reducing the potential impact it might cause.
Therefore, an ex-ante estimate of the change in equity value during a systemic event is
needed. This is to ensure that systemic risk can be monitored continuously, such that
necessary impacts can be made in reasonable time, making sure that a potential crisis is
prevented. As an estimate for how the equity value changes during a systemic event, the MES
measure can be applied. Remember from equation 2-5 that

measures the expected

return of financial institution i conditional on the systemic event taking place. The MES
measure is found ex-ante by using historical market data. Let h be the length of the time
interval that is applied, then the estimated time interval can be denoted as
replacing the VaR threshold with C in equation 2-5,

. By

can be written as:

2-9

By decomposing the conditional expected equity value into the equity value at time t and the
expected return conditional on a systemic event, the expression for

can be rewritten as:

2-10

The first term in equation 2-10 is a measure of the individual risk capturing the adverse effect
that debt has. As the debt level of the financial institution increases, its working capital
Page 16 of 128

decreases making it more likely that it will default and spread negative externalities to the
rest of the system. The second term is a measure of how integrated the financial institution is
with the system when the system is distressed. The larger this measure is (

the

more systemic risk the financial institution is expecting to contribute with should a systemic
event occur9. The sum of these two terms therefore constitutes to a systemic risk measure
that incorporates both the financial condition of the financial institution as well as its
expected contribution to systemic risk should a systemic event occur. It therefore successfully
manages to merge balance sheet information with market data into one systemic risk
measure. Built on the discussion from the previous subsection, this was also the purpose of
this subsection.
Another remark about the SES measure is that it can be viewed as the propensity of a financial
institution to be under-capitalized when the system as a whole is under-capitalized. The
reason this propensity is interesting is because if a financial institution is well undercapitalized or even defaults when the system as a whole is under-capitalized, it is very likely
to propagate negative externality to the rest of the system. The default of Bear Stearns or
Lehman Brothers under the 2007-2009 financial crisis are good examples of this. On the other
hand, if a financial institution is under-capitalized or defaults when the system as a whole is
well-capitalized, its losses are likely to be absorbed by the system without evolving into a
systemic crisis. The collapse of Barings Bank is a good example of this case; due to
unauthorized trading and large losses on the derivative market the bank defaulted in 1995.
Even though the bank must be considered fairly large at the time of default10, this default
event did not disrupt the global financial system (not even the UKs financial system). This is
an example of an idiosyncratic shock that occurred while the system was well-capitalized, and
therefore it did not lead to a systemic crisis11.

In order to control for the size of the financial institution both the debt value ( ) and the market value of
equity ( ) are included in absolute terms.
10 The banks reported capital at the time of default was around $600 million (Benhamou, u.d.)
11 The Dutch bank ING acquired Barings Bank for 1 and assumed all of its liabilities with minimal government
involvement and no commitment from tax payers money (Acharya, et al., 2010). (Krnert, 2003) stated
furthermore that, The crisis did not, however, spread to the banking system as a whole by way of dominos effects.
The was due mainly to the fact that it was limited to an isolated case of fraud by a single trader,

Page 17 of 128

The challenging part when estimating SES is to find an appropriate ex-ante measure for MES.
Remember that the purpose of MES is to estimate the change in equity value conditional on a
systemic event, as well as being able to provide this estimate ex-ante such that required
actions can be taken before the systemic event actually occurs. This estimation can be done
using different estimation techniques, different time horizons (t) or different threshold levels
(C). When turning to the practical part, decisions such as frequency of data and which market
index to use can also be relevant for the outcome. In order to find the best MES measure
among the possible candidates a linear regression approach is used to estimate how well MES
predicted the equity change of the financial institutions during the 2007-2009 financial crisis.
Since the 2007-2009 financial crisis can be considered a systemic event, it is possible to use
pre-crisis data to assesses the performance of the different MES candidates and determine
which one predicts the equity change under the 2007-2009 financial crisis best. By using the
2007-2009 financial crisis as a case study the equity value change is estimated after
conditioning on a systemic event. To illustrate this linear regression approach more explicitly
consider equation 2-10 in section 2 after controlling for the size of the financial institution by
dividing with equity value,

2-11

where

is the leverage ratio of financial institution i and k is the share of minimum asset

level that is required by management or regulators. The ratio on the left hand side is the
relative systemic expected shortfall and needs to be estimated ex-post, i.e., during the crisis.
Following (Acharya, et al., 2010) this ratio is estimated as the percentage stock price change
over the 2007-2009 financial crisis period12. Denote this percentage change as the realized
SES (RSES). The regression model that is applied can therefore be stated as:

12

Section 3.1 explains which time intervals are considered as the crisis period

Page 18 of 128

2-12

The interesting relationship to measure is between

coefficient of interest is first and foremost

and

and therefore the

. Section 4 covers this regression analysis and

provides a suggestion on which MES candidate is the most appropriate to use.

2.4 The systemic risk index (SRISK)

The MES measure that is used is estimated from daily observations. This means that it
estimates the expected daily equity loss given that the system is distressed. In order to fully
grasp the impact that a potential crisis might have, it is useful to estimate the expected equity
loss over a longer period since crises often have long run effects. (Acharya, et al., 2012)
propose that a long run marginal expected shortfall (LRMES) can be approximated from the
daily MES by applying the following formula13:

2-13

where

is a correction factor and is the length of the crisis period. Following (Engle, et al.,

2012) and (Brownless & Engle, 2012) the crisis period is defined as a market drop of 40%
over a six-month period. This means, for instance, when applying daily data, is equal to 126
(assume each month holds 21 trading days).
The systemic risk index (SRISK) takes into account the long run effects of a systemic event,
and therefore it applies the LRMES instead of the MES when estimating the expected systemic
shortfall. Furthermore, since a financial institution cannot possess negative systemic risk a
lower boundary of zero is imposed onto the SRISK measure. SRISK can therefore be stated as:

2-14

13 See appendix 8.3 for details on how this approximation is found

Page 19 of 128

From this expression the total amount of systemic risk in the system is defined as:

2-15

where n is the total number of financial institutions in the system. The relative systemic risk
that each financial institution possesses can be found by considering the

expression:

2-16

Since long-run effects are taken into account the SRISK measure can be viewed as the amount
of capital that a financial institution would need to raise in order to function normally if
another financial crisis occur. By aggregating SRISK,

, can be thought of as the total

amount of capital that the government would have to provide to bailout the financial system
in case of a crisis, and

is the percentage of the bailout money that would be needed

by financial institution i.
Since equity return is an essential input to the model, an underlying assumption is that all
market information about the financial institution (e.g., credit risk and liquidity risk) is
reflected in the stock price of the financial institution. Put differently, it is assumed that the
market is efficient (Reilly & Brown, 2009).

3 Methodology
The purpose of this chapter is to describe the approach that this thesis uses in order to
measure systemic risk in the system. By applying the theory presented in the previous section
as the theoretical background of this thesis, the required data has been collected in order to
apply the underlying model to assess systemic risk. Once this step has been covered the
performance of the model can be evaluated and initiatives can be taken in order to either
modify the model or conclude that it fails to serve its purpose given the data that has been
Page 20 of 128

used. The approach of this thesis, therefore, starts off by following a deductive approach,
where a set of premises that have been derived from logical reasoning are presented and
afterwards applied and tested using empirical data (Saunders, et al., 2012)14. When evaluating
the model and determining whether it needs to be modified or rejected the mindset is more
following an abductive approach; based on the results that the model provides plausible
extensions of the model are considered in order to take into account potential omitted factors
that can help improve the model (Suddaby, 2006). From this reasoning the model is revised
based on the data applied and initiatives have been made to either modify or reject the model.
It should of course be kept in mind that the theory and the underlying model are tested based
on a case study of only considering financial institution in Denmark during a specific time
period. If it is found that the model performs well and is useful to assess systemic risk based
on this case study, the conclusion can only strengthen the inductive argument of the model,
but cannot make a universal generalization. If, on the other hand, it is found that the model
fails to serve its purpose the conclusion from this thesis can help falsify the theory for the
specific case study considered (Popper, 1935).
The theory and methods applied to answer the research questions are based on the notion
that "reality" exists "out there" and is made up of tangible empirical entities which are
possible to identify and measure. By applying logically reasoning, statistical tools and
mathematical computation, it is therefore believed that the systemic risk of the financial
institution is a measure that can be located and quantified. This idea corresponds well with
the ontological view of realism and positivism (Saunders, et al., 2012).
The next subsection presents the time horizons that are considered in this thesis, while
subsection 3.2 provides a comprehensive description of the data that has been used in the
analysis part of this thesis.

14

The opposite approach of deductive is inductive. When applying an inductive approach the researcher
formulates a theory based on the pattern and relationships that she observes in the data (Saunders, et al., 2012)

Page 21 of 128

3.1 Time horizons

This thesis aims to measure systemic risk in the Danish financial sector today (end of 2013).
In doing so, the MES variable used in the model requires historical data that, from an
estimation point of view, preferably contains a crisis period. In order to realize this, the time
horizon of this thesis is broken down to three time periods based on the 2007-2009 financial
crisis:

Pre-crisis: From the beginning of June 2006 until the end of June 2007

Crisis: From the beginning of July 2007 until the end of December 2008

Current condition: From the beginning of January 2013 until the end of December
2013

The time intervals of pre-crisis and crisis match the periods that are used in (Acharya, et al.,
2010). However, (Acharya, et al., 2010) are measuring the systemic risk in the financial sector
in the US, and it is therefore debatable if the same periods are applicable when analyzing the
systemic risk in the financial sector in Denmark. Therefore, as a starting point, this thesis uses
the same time periods that (Acharya, et al., 2010) uses, but also challenges these time
intervals and investigates whether some alternative periods are more suitable for the
financial sector in Denmark. Especially, it is clear, that since the financial crisis initially began
in the US, it is appealing to think that the financial crisis hit Denmark at a later stage and
perhaps lasted longer than it did in the US. Also, when investigating Figure 17 (see appendix
8.1) more closely, it seems as all the market indices that are considered hit their lowest level
around quarter 1 or quarter 2 in 2009 (including the Danish market index KAX) and not end
of 2008. This supports the fact that using a cut-off point of end 2008 might be too early and
that the crisis period should be extended by some degree. This will be investigated further
later in the thesis.

Page 22 of 128

3.2 Description of data

This section describes the empirical data that is applied in this thesis. Since analyses are made
based on pre-crisis, crisis and current condition, the data sample has naturally been broken
down into these three different time horizons. To illustrate how the data looks like the data
presented in this subsection follows the data used in the MES analysis (section 4), which is
based on the pre-crisis period. This section also illustrates, through examples, how some of
the variables used in this thesis are computed.
During the period 2005-2012 the Danish Financial Services Authorities (the Danish FSA) had
168 different financial institutions under observation15.

The majority of these financial

institutions are not listed, and since stock returns are required for the analyses, these
financial institutions are necessarily filtered out. Furthermore, since the MES analyses
(section 4) is done using pre-crisis data it is not only required that the financial institutions
are listed, but also that they are listed one year prior to the 2007-2009 financial crisis, i.e., no
later than the beginning of June 2006. After filtering out these financial institutions, the precrisis sample size is reduced to 48 financial institutions16. In this sample financial institutions
such as SEB, Svenska Handelsbanken (usually only referred to as Handelsbanken) and DNB
Bank are included even though their main headquarters is located outside of Denmark17. It is
not clear where to exactly draw the borderline when only considering Danish financial
institutions, but in order to increase the Danish sample size in the MES analysis (section 4)
these financial institutions are included as part of the Danish sample. As a result, these
financial institutions are also kept as part of the Danish sample in this section when
describing the data. However, when measuring the systemic risk of the financial institutions
in Denmark it seems more natural to only consider the pure Danish financial institutions,
and therefore SEB, Handelsbanken and DNB Bank are not included in the main analyses in the
sections Measuring systemic risk (section 5) and Implementation and discussion (section 6).
15

Based on data provided from www.finanstilsynet.dk

16 One of the largest financial institutions in Denmark is Nykredit. Unfortunately, for this analysis Nykredit is not

listed on the stock exchange and therefore its stock price changes are not observable. However, as an
approximation the stock price of Nykredits investment fund, Nykredit Invest Danske Aktier, has been used as a
proxy for the stock price of the entire concern. Appendix 8.4 illustrates why this approximation seems
reasonable
17 The first three are located in Stockholm, Sweden, while DNB Banks headquarter is located in Oslo, Norway

Page 23 of 128

Beside banks, other financial institutions are also included in the sample. These are financial
institutions such as investment funds, real estate firms and insurance companies. Due to the
risk profile of these types of financial institutions they also contribute to the risk of the
system, and are therefore natural to incorporate when assessing systemic risk in the financial
sector18. After including these other financial institutions, the sample size is increased to 56.
As expected, the size difference between the financial institutions in the sample varies
significantly. To better quantify this difference, the financial institutions are broken down to
three different size groups based on their total assets. The definition of each size group
corresponds to the definition that the Danish FSA uses. These definitions are presented in the
upper left hand table of Figure 2 below. The table in the lower left hand of Figure 2 shows how
many financial institutions are in each size group in the sample considered. To illustrate this
size difference graphically, the right hand graph in Figure 2 shows the accumulated share of
total assets among the financial institutions in the sample. The total assets for each financial
institution are taken from Q2-2007. The highlighted areas, G1, G2 and G3, show how much
asset group 1, asset group 2 and asset group 3 account for, respectively. As can be seen from
the graph, the financial institutions in asset group 1 account for almost 95% of the total assets
in the sample. Asset group 1 consists of eight financial institutions (from largest to smallest);
Danske Bank, Nordea, Handelsbanken, SEB, DNB Bank, Jyske Bank, Nykredit and Sydbank.
This example illustrates how concentrated the financial sector in Denmark is19. This might
also indicate that the systemic risk is concentrated among a few players on the market.

18

This corresponds to the approach used by (Acharya, et al., 2010), (Engle, et al., 2012) and (Brownless & Engle,
2012)
19 Even after excluding the foreign banks, SEB, Handelsbanken and DNB Bank, the market is still very
concentrated. After excluding these banks asset group 1 accounts for 92% of the total assets

Page 24 of 128

Figure 2: Upper-left: Definition of asset groups used by the Danish Financial Services Authority (finanstilsynet). Lower-left:
Number of financial institutions by total asset group. Right: Accumulated share of total assets. The G1 area highlights the
financial institutions that are in group 1, while G2 and G3 highlight the financial institutions that are in group 2 and 3,
respectively. The total assets are taken from Q2-2007

Most of the data used in this thesis is gathered from Bloomberg20. Some of the accounting data
(e.g., total assets and total equity) were, however, not available in the Bloomberg database,
and had to be collected manually by looking through annual reports for the corresponding
financial institutions.
To get as accurate a picture of the condition before the crisis as possible, accounting data from
the second quarter of 2007 has been applied. However, semi-annual data is not always easily
accessible for all banks (especially since some of them do not exist anymore), and in case this
data has not been found, end-of-year data from 2006 has been used instead. The same method
has been used for 2013 data; the first choice has been end-of-year data, but if this data has not
been available, second quarter data from 2013 has been used. Finally, if neither end-of-year
data nor semi-annual data for 2013 has been found, end-of-year data for 2012 has been used.
Some of the data points used in the analysis are taken directly from the annual reports, while
others have to be computed using the data that is given. The MES and RSES in particular need

20

Stockprices on Bonusbanken were not available through Bloomberg so these prices are taken from
www.euroinvestor.dk

Page 25 of 128

to be computed in order to run the linear regression model presented in section 2. The
following subsection demonstrates how these variables are computed.
3.2.1 MES, RSES and RSESmax
The MES is found by taking minus the average return of each financial institution during the
5% worst days for the market index. The market index used is the all-share index KAX, which
is a capitalized-weighted index of all stocks traded on the Copenhagen Stock Exchange. Figure
3 shows the histogram and return density function for the KAX index during the pre-crisis
period, i.e., from June 2006 until June 2007. The shaded area under the graph highlights the
5% worst days that are compared against the return of each financial institution. The precrisis period consists of 271 trading days, which means that the 5% worst market days
corresponds to the 14 worst market days.
The table in Figure 3 gives an overview of the 5% worst days for the KAX index and as an
example, the returns for Danske Bank, Nordea and Jyske Bank are also included in the table.
From the table it is clear that the returns for Danske Bank, Nordea and Jyske Bank follow the
market return (KAX). Not only are the returns following each other, but the same ascending
order seems to hold across all banks to some extent. For instance, the return on the worst
market day for the KAX index, 6/13/2006, is also the worst market day for Danske Bank and
Jyske Bank, while it is the second worst market day for Nordea21. However, this relationship
becomes gradually less clear as we move down the table; for instance, the return for Jyske
Bank on the 13th worst market day, 1/4/2007, was actually positive. Nevertheless, there
seems to be some correlation between the market returns and the returns of the financial
institutions when only considering the left tail of the markets return distribution.

21

This also holds after including all pre-crisis return of Danske Bank, Nordea and Jyske Bank., i.e. not only
considering the 14 worst market returns

Page 26 of 128

Figure 3: Left: Histogram of the pre-crisis return for the market index KAX. The shaded area under the graph corresponds to
the return during the 5% worst days (return in 14 worst days). Right: The table shows the returns for KAX, Danske Bank,
Nordea and Jyske Bank during the 5% worst market days. The Date column shows the date of the 5% worst days (14 days).
The table is sorted in ascending order by the market return of the KAX index

Based on the 5% worst market days the MES for financial institution i is calculated by
applying the following formula:

3-1

In order to estimate how well the ex-ante MES measure performs, it is compared against the
realized return that the financial institutions experienced during the crisis. Denote the
realized return for financial institution i as

, and since the crisis period is defined as July

2007 until December 2008, this expression can be stated more explicitly as:

3-2

The figure on the left hand of Figure 4 (page 29) shows graphically how the stock price for
Danske Bank and Nordea evolved during the crisis period, and how large the RSES is for these
two financial institutions.

Page 27 of 128

RSES is calculated from two pre-determined dates that are defined according to the same
definitions that (Acharya, et al., 2010) applies. Since it is rather unclear exactly when the crisis
began and when exactly it ended, it can seem as though these two dates are picked arbitrarily,
and a change in either of these dates could have a huge impact on RSES. For instance, if we
take Danske Bank as an example, if the end-date chosen was extended to the 6th of March
2009 instead of the end of 2008, RSES would be -85% instead of -77%. If the time period on
the other hand is reduced such that the end-date is 25th of September 2008 instead of the end
of 2008, RSES would be -37% instead of -77%. Of course these random dates would probably
never be chosen specifically as end-dates, but this example illustrates well how a change in
the time period can influence RSES. To minimize potential measurement error, and avoid
RSES being too dependent on which begin-date and end-date are chosen,

is

calculated as the maximum realized shortfall during a given period. This value represents the
maximum loss (minimum return) that financial institution i suffered during a given time
period:

3-3

A natural restriction imposed on equation 3-3 is that Date 1 occurs before Date 2. This is to
ensure that the returns are calculated in chronological order. Furthermore, the stock prices
that are chosen need to all be from the same time period, i.e.,
and

for

. If these two conditions are fulfilled

equation 3-3 can also be written as (see appendix 8.6 for proof):

3-4

The figure on the right hand of Figure 4 illustrates graphically how

is found for

Danske Bank given the crisis period July 2007 until December 2008. The maximum stock
price during this period is found on the 4th of July 2007 while the lowest is found on the 22nd
of December 2008. These dates are very close to the begin-date and end-date of the crisis

Page 28 of 128

period, therefore there is very little difference between RSES and

in Danske Banks

case (-77% compared with -79%).

Figure 4: Left: The daily stock prices for Danske Bank and Nordea during the period 2006-2009. The area between the dotted
lines is the crisis period, and the textboxes show the percentage loss for Danske Bank (blue textbox) and Nordea (red
textbox) during this period. The percentage loss during the crisis period is defined as RSES in this thesis. Right: The graph
illustrates how
is found for Danske Bank

Given that

calculates the maximum loss during the crisis period it will naturally

always be larger than or equal to RSES, i.e.,

In order to put the explanatory power of MES in perspective, the prediction powers of other
alternative risk measures are also tested. Like MES these alternative risk measures are all
measured during the pre-crisis period:

LVG: measure for the leverage ratio of the financial institution. This ratio is found by
dividing the quasi-market value of assets with market capitalization using data from
the second quarter of 200722

ES: the expected shortfall of the firm in its own left tail, i.e., the negative of the financial
institutions average stock return on its own 5% worst days. Similar to MES, but
instead of applying the 5% worst market days, the 5% worst days of the financial
institution is applied

22

See appendix 8.7 for a more detailed description of how this ratio is computed

Page 29 of 128

Volatility: annualized standard deviation of returns based on the daily stock return of
the financial institution. The following formula has been applied (Hull, 2010):

3-5

Beta: the covariance between the stock return of the financial institution and the
return of the market (KAX) divided by the variance of the market returns

Table 1 below shows the summary statistics for RSES and

together with the

alternative risk measures presented above. Interestingly, the standard deviation for
is lower than the standard deviation for

, indicating that

financial institution to financial institution than

varies more from

does. This could suggest that the

time period that financial institutions suffered due to the crisis needs to be individually
determined and using a one-period-fits-all approach might not give the most accurate picture
of the severity of the crisis. Therefore, using the same pre-determined dates for all financial
institutions, like (Acharya, et al., 2010) do, might not give the most accurate picture on how
much each financial institution actually lost due to the crisis. As a result, when determining
the realized return of each financial institution during the crisis period, it might be more
correct to look at the maximum loss over a fixed period (
end-points of a fixed period (

) instead of the loss over the

).

Summary statistics
Statistic

RSES

RSESmax

MES

LVG

ES

Vol

Beta

N
Mean
St. Dev.
Min
Median
Max

56
-0.66
0.20
-1.00
-0.67
-0.24

56
-0.71
0.17
-1.00
-0.74
-0.28

56
0.01
0.01
-0.01
0.01
0.03

56
5.71
3.78
1.09
5.06
19.83

56
0.04
0.01
0.01
0.03
0.09

56
0.24
0.09
0.11
0.23
0.61

56
0.51
0.41
-0.15
0.42
1.72

Table 1: Summary statistics of RSES and RSESmax together with the risk measures

Page 30 of 128

3.2.2 Including financial institutions from Norway and Sweden

The initial analysis only includes financial institutions from Denmark. Given that this only
consist of 56 financial institutions it can be hard to find significant results based on such a
small sample size. Therefore, in order to increase the statistical power of the MES analysis,
financial institutions from Norway and Sweden have been included in the sample. Appendix
8.5 gives a complete overview of the all the financial institutions that are included in the
sample.
After including financial institutions from Norway and Sweden the sample size is increased to
98 financial institutions. Table 2 and Table 3 show how these financial institutions are broken
down by country, type and group. Table 3 shows that having included financial institutions
from Norway and Sweden the industry remains concentrated as identified earlier.

Country

Bank

Real estate

Investment fund

Insurance

Total
56
20
22

98

Denmark
Norway
Sweden

48
18
2

3
2
13

3
0
7

2
0
0

Total

68

18

10

Table 2: Financial institutions by country and type

Country

Asset group 1

Asset group 2

Asset group 3

Total

Denmark
Norway
Sweden

8
3
3

11
8
9

37
9
10

56
20
22

14

28

56

98

Total

Table 3: Financial institutions by country and asset group size

Table 13 (see appendix 8.8) presents the summary statistics of the risk measures after the
financial institutions from Norway and Sweden have been incorporated. Comparing this table
with Table 1 we see that the mean and median value of RSES and

decrease when

financial institutions from Norway and Sweden are included, indicating that the financial
institutions in Norway and Sweden did on average suffer less than the financial institutions in
Denmark. Also, due to the large level of LVG in Norway the mean value of LVG is increased
considerably. Apart from that the summary statistics of the other variables remain relatively
unchanged.

Page 31 of 128

3.2.3 Market indices

Since financial institutions from Denmark, Norway and Sweden have been included in the
sample three different market indices have been applied to measure tail dependency between
market returns and the returns of financial institutions. By applying separate local market
indices, instead of an overall region index, the tail dependency is believed to be measured
more accurately, and hence provides an adequate picture of the systemic risk condition of the
financial institutions23. The market indices that are used in this thesis are:

The KAX index (Denmark): An all-share market index that trades on the Copenhagen
Stock Exchange. It is a capitalized-weighted index of all stocks traded on the
Copenhagen Stock Exchange

The OSEAX index (Norway): An all-share market index that trades on the Oslo Stock
Exchange. It is a capitalized-weighted index of all stocks traded on the Oslo Stock
Exchange

The OMXSPI index (Sweden): An all-share market index that trades on the OMX Nordic
Exchange Stockholm. This index was formerly known as the SAX index. It is a
capitalized-weighted index of all stocks traded on the OMX Nordic Exchange
Stockholm

Based on the collected data presented in this subsection a thorough analysis of the MES
measure is made in the upcoming section. From this analysis the most appropriate MES
candidate can be identified and used to measure systemic risk through the model presented in
section 2.
23

Even though SEB, Handelsbanken and DNB Bank are part of the Danish sample for the MES analysis these
financial institutions are not listed on the Copenhagen Stock Exchange. Consequently, it would be more
consistent to hold their market returns up against the market index in their respective country instead of the
Danish market index. Therefore, the market returns of SEB and Handelsbanken is being held up against the
Swedish market index, whereas the market return of DNB Bank is being held up against the Norwegian market
index.

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4 MES analysis
As pointed out in section 2, the main challenge when estimating the systemic expected shortfall
(SES) is to find an appropriate MES measure. The hypothesis behind the MES measure is that
the more the financial institution suffers during the bad market days (the larger MES) the
larger will its loss be once the crisis hits (the smaller RSES). Based on the linear regression
model presented in section 2 (equation 2-11), (Acharya, et al., 2010) suggest to estimate MES
as the average daily return on the 5% worst market days over a one-year period. The data set
used to provide this suggestion is built on large financial institutions that operate in the US
and it is not clear if the same approach can be used directly given the data set used in this
thesis24. On the contrary, given that the data sample in this thesis consist of small, midcap and
large financial institutions in the Nordics, it is reasonable to posit that size difference and
dissimilarities in the markets will play a significant role making the same approach a doubtful
best candidate. Therefore, it is important to have a critical view on the approach used by
(Acharya, et al., 2010) and test if there might be some better way MES can be estimated given
the data set used in this thesis. Once this examination has been made, the most appropriate
candidate can be found and the model presented in section 2 can be applied directly to
measure systemic risk. This section therefore provides a suggestion for the missing link that is
required to apply the tools developed by (Acharya, et al., 2010) and (Brownless & Engle,
2012) to measure systemic risk in Denmark.
As a natural starting point to this section, the first MES candidate is evaluated based on the
same approach that (Acharya, et al., 2010) uses only undertaken for the Danish sector instead
of the US sector.

4.1 The case of only Danish financial institutions

In this subsection only financial institutions that operate on the Danish market are
considered25. To investigate if there is any clear relationship between RSES and MES Figure 5

24

The data set in (Acharya, et al., 2010) consists more specifically of 102 financial institutions with a market
capitalization as of end of June 2007 in excess of $5 billion
25 The complete list of financial institutions that are included can be found in appendix 8.5.

Page 33 of 128

shows a scatterplot between RSES and MES. To further break down the data, the different
institution types are labeled with different symbols and different colors to give an indication
of the relationship between RSES and MES by institution type. The data points from this
scatterplot seem to be very scattered without indicating any linear relationship between MES
and RSES. Furthermore, it does not look like excluding any specific institution type would
strengthen the linear relationship. If any institution type falls outside of what the model
predicts it is most clearly the insurance companies26. This could indicate that it is not
appropriate to include this institution type in the sample when assessing the model, or that
there is some exogenous factor that holds for the insurance companies that does not hold for
the other institution types. However, given that the overall data sample is still relatively small
and there only are two insurance companies included, it would be too soon to conclude
anything from this first analysis.

Figure 5: Scatterplot of RSES and MES. The data points are broken down by institution type. The regression line is plotted
together with the 95% and 99% confidence interval

It is perhaps not so surprising that this analysis did not provide a strong relationship between
RSES and MES considering that the sample only consists of 56 financial institutions while
(Acharya, et al., 2010) found significant results after including 102 financial institutions in

26

Given the MES level of the insurance companies the model would expect them to have suffered a much larger
loss during the crisis (have a much lower RSES) than what they have

Page 34 of 128

their sample. Therefore, in order to increase the statistical power of this analysis, financial
institutions from Norway and Sweden are included in the sample.

4.2 Including financial institutions from Norway and Sweden

The purpose of including financial institutions from Norway and Sweden is to test if an
increase in the sample size can give some clearer trends in regards to the relationship
between RSES and MES. By including financial institutions from other countries the estimation
of the relationship between RSES and MES in Denmark can, of course, be somewhat distorted.
However, since many of the same institutions operate across all countries in Scandinavian,
this region has become increasingly interconnected 27 . Furthermore, given that the
Scandinavian countries all follow the same Nordic model in terms of economic and social
welfare it seems to be fair to pool the financial institutions in these countries together.
Figure 6 below shows a scatterplot of RSES and MES after including financial institutions from
Norway and Sweden. As previously, the data points are broken down by institution type to
illustrate how the relationship between RSES and MES is by institution type. Again a
surprising upward trend appears when a downward relationship between RSES and MES is
expected. This is again contradictive of the findings made by (Acharya, et al., 2010). The
breakdown illustrates though that, given the MES level, it is mainly the financial institutions
that that are non-banks that have a relatively large RSES compared with what is predicted by
the model (or the other way around; given the relative large RSES the model predicts a much
lower MES). Motivated by the discussion in subsection 3.1, the relatively low realized loss
during the crisis could have been caused by the fact that computing realized returns based on
the end-points of the crisis period is perhaps not representative in terms of how much
financial institutions actually suffered due to the crisis. An alternative way to avoid this
drawback is to look at the maximum loss for each financial institution during the period,
represented by the

measure. As expected, the right hand graph of Figure 6 shows

that the realized returns over the crisis period decreases after RSES is replaced with

Moreover, the linear trend between MES and realized returns over the crisis period is now
27

Example of institutions that operate across all the countries in Scandinavia are: Nordea, Danske Bank,
Skandinaviska Enskilda Banken (SEB) and Svenska Handelsbanken (Handelsbanken)

Page 35 of 128

negative as is expected. However, after running the regression model the negative coefficient
on MES is not statistically significant, and therefore it would be too soon to conclude any
substantial relationship between MES and

at this point (see regression output in

Table 14, appendix 8.10).

Figure 6: Left: Scatterplot of RSES and MES including financial institutions from Norway and Sweden. Right: Scatterplot of
RSESmax and MES including financial institutions from Norway and Sweden. The data points are broken down by institution
type. The regression line is plotted on both plots together with the 95% and 99% confidence interval

To dig deeper into the realized return of the financial institutions during the crisis, the initial
crisis period suggested by (Acharya, et al., 2010) needs to be challenged. The following
subsection investigates if the initial crisis period should be extended.

4.3 Extending the crisis period

As pointed out in subsection 3.1 the crisis period used in (Acharya, et al., 2010) might not be
the most appropriate one when analyzing the financial crisis in Denmark. The drawback of
using too short a crisis period is that the downturn of the financial institution might not be
fully captured since the end-point of the crisis cuts off the crisis period before the crisis truly
hits. In the report The Financial Crisis in Denmark causes, consequences and lessons
(Rangvid-udvalget, 2013) the Systemic Risk Council in Denmark defines the financial crisis to
be from the second quarter 2008 until the second quarter 2009; thereby shifting the crisis
period half a year compared with the period used in (Acharya, et al., 2010). As an input to this
Page 36 of 128

discussion Figure 20 (see appendix 8.9) shows how the price of the Danish market index
(KAX) and some of the largest financial institutions in Denmark evolved over the period June
2006 until December 2010 (the time series have all been indexed to June 2006). It is clear that
the minimum value of these time series takes place after the end of 2008, around the first or
second quarter of 2009, which indicates that the crisis lasted longer than the end of 2008 in
Denmark.
The graph on the left hand side of Figure 7 shows the realized return for all financial
institutions after extending the crisis period to second quarter of 2009 (
and after extending the crisis period to end of 2009 (

Q2 2009)

Q4 2009). For comparative

reasons the realized return over the end-points of the initial crisis period, RSES, has also been
included in the graph. From the graphs on the right hand side of Figure 7 it is clear that the
realized return changes most when going from RSES to

. Again, this shows the

considerable difference that is obtained when letting the return dates float freely within the
crisis period instead of having them fixed as end-points like (Acharya, et al., 2010) do. To
verify if the initial crisis period is too short, the second graph on the right hand side of Figure
7 shows the difference in
2009 (

when the crisis period is extended to the second quarter of

Q2 2009). From this graph it is clear that the realized return of most

financial institutions decreases even further when the crisis period is extended. This entails
that the lowest stock price value for almost all financial institutions in the sample actually
occurs after end 2008, and by cutting the period off at the end of 2008 the severity of the
crisis is not truly captured. To validate if extending the crisis period to the second quarter of
2009 is sufficient,

has also been computed after extending the crisis period to the

fourth quarter of 2009 (

Figure 7 shows the difference in

Q4 2009). The bottom graph on the right hand side of

when considering these two crisis periods. This

graph shows that the maximum loss during the crisis period occurs before the second quarter
of 2009 for almost all financial institutions, but there are, however, a few financial institutions
that are still suffering after this point. In order to include these losses the crisis period should
be extended to the fourth quarter of 2009 instead of only to the second quarter of 200928.

28

The Danish financial institutions that are still suffering after Q2-2009 are: Realia, Tnder Bank, Ln og Spar
Bank og Jeudan. The other financial institutions are from Norway: Aurskog Sparebank, Klepp Sparebank and
Hland og Setskog Sparebank

Page 37 of 128

Figure 7: Left: RSES,

,
Q2-2009 and
Q4-2009 for all financial institutions. The financial institutions
are presented in an ascending order based on their RSES value. Right: Top right shows percentage difference between RSES
and
. The other two show the percentage difference in
given different crisis periods

Based on the analysis presented in this subsection the crisis period is extended by one year
such that it ends in 2009 instead of 2008. This means that the initial crisis period July 2007
until December 2008 is replaced with the crisis period July 2007 until December 2009 going
forward.
The graph on the left hand side of Figure 8 shows a scatterplot of
By comparing this scatterplot with Figure 6, where

Q4-2009 and MES.

is applied instead of

Q4-2009, it is clear that the data points have generally decreased (lower realized return) and
become more compact. Especially, it is the financial institutions that had a relatively low loss
during the initial crisis period that are now suffering a larger loss due to the change in crisis
period. However, as Table 14 (appendix 8.10) shows, the linear relationship between
Q4-2009 and MES is still not significant, and therefore it does not seem that changing
the crisis period alone is sufficient to verify that there exists a relationship between MES and
RSES that can be utilized when applying the systemic risk model presented in section 2.

Page 38 of 128

Figure 8: Left: Scatterplot of

Q4-2009 and MES, where the data points are broken down by institution type. Right:
Scatterplot of
Q4-2009 and MES, where the data points are broken down by volume group. Footnote 29
demonstrates how the volume is calculated and Table 4 shows the definition for each volume group. The regression line is
plotted on both plots together with the 95% and 99% confidence interval

The focus in this subsection has been on potential measurement errors related to the realized
return of the financial institutions during the crisis period (RSES). There is reason to believe
that the MES measure could also contain some measurement errors. In order to find a strong
relationship between market return and the return of financial institutions during bad market
days, an underlying assumption is that market shocks are reflected instantaneously in the
stock price of individual financial institutions (the market efficiency assumption). If this
assumption is not fulfilled, it is difficult to observe a strong tail dependency between the
market return and the return of financial institutions even though the true tail dependency
might actually be strong.
A natural parameter to incorporate when assessing if market shocks transfer instantaneously
is the volume amount that the stock trades under. If the stock trades frequently (has a large
volume) it is fair to assume that investors can quickly sell off their shares if needed, which
implies that a market shock would have an instantaneous effect on the stock price. On the
other hand, if the stock trades infrequently (has a low volume) this indicates, that investors
may have a hard time finding potential buyers, and therefore have to wait a couple of days
before they can sell off their shares. This liquidity issue could mean that a market shock would

Page 39 of 128

not have an instantaneous effect on the stock price, but rather a delayed effect which is
reflected in the stock price a couple of days after the actual market shock occurred. As a
result, this is causing the MES measure to be downward biased
In order to investigate the volume level of the financial institutions they have been grouped
into four groups based on their average daily pre-crisis volume29. The threshold for each
volume group is presented in Table 4 below. These thresholds are chosen such that the
financial institutions are approximately equally distributed among the groups while still
having pretty and reasonable values30. In order to put these thresholds in perspective, it
should be pointed out that the listed companies on Nasdaq OMX Nordic had an average daily
volume of roughly 1,200,000 in 2007, whereas the listed companies on Nasdaq OMX
Copenhagen had an average daily volume of roughly 121,000 in 2007 (see appendix 8.11).
From a Danish standpoint this means that only the financial institutions that fall into group 1
have an average daily volume that could be larger than that of an average company listed on
Nasdaq OMX Copenhagen in 2007.
Volume group

Above (in average daily pre-crisis volume)

Group 1
Group 2
Group 3
Group 4

100,000
10,000
1,000
0
Table 4: Definition of volume groups

If MES truly is downward biased, because of a liquidity issue among the financial institutions,
it is anticipated that the financial institutions with lower volumes (group 3 and group 4) have
a lower MES measure on average. As the right hand graph of Figure 8 (page 39) demonstrates,
it appears as if MES and average daily pre-crisis volume are directly related; volume group 1
seems in general to have the largest MES values, volume group 2 seems in general to have the
second largest MES values while volume group 3 and volume group 4 in general have the
29

In mathematical terms the average daily pre-crisis volume is calculated by applying the following formula:

30

The threshold for each volume group is set according to a factor 10, such that group 1s threshold is 10 times
as large as group 2s and group 2s threshold is 10 times as large as group 3s. Group 4 contains financial
institutions that have registered average daily pre-crisis volume of less than 1000

Page 40 of 128

lowest MES values. To further analyze the relationship between MES and average daily precrisis volume, the average MES and weighted average MES for each volume group is also
computed and presented in appendix 8.12. As before, this analysis also shows a direct
relationship between MES and average pre-crisis volume.
Given that many of the financial institutions clearly are illiquid the MES measure is most likely
downward biased. In order to control for this estimation problem, the same analysis are done
using weekly data instead of daily data. The following subsection looks at how the analyses
changes when weekly data is used instead of daily data.

4.4 Using weekly data

In order to overcome the estimation problem, caused by illiquid stocks, the daily data has
been exchanged with weekly data31. This means that the MES is now measured from the 5%
worst pre-crisis market weeks instead of the 5% worst pre-crisis market days.
Switching from daily data to weekly data has though its cost. Firstly, since weekly data is
much less frequent than daily data, the observations are naturally fewer when weekly data is
applied. This has a drawback on the estimation of MES since the pre-crisis period that it is
estimated from, now contains fewer observations. A way to overcome this setback is to extend
the pre-crisis period such that older observations are taken into account as well. Another
option is to increase the percentile level that is used when computing MES. For instance,
instead of considering only 5% of the worst market weeks, one could consider 10% or 15% of
the worst market weeks. Both of these options are analyzed in this section. Secondly, if the
pre-crisis period is extended, stock prices for the financial institutions need expanding over
an even larger time period since the 5% worst market weeks are now taken from a longer
time horizon. Luckily, this drawback is only at the cost of two financial institutions leaving the
total number of financial institutions at 96 in this analysis32.
31

The problem of getting biased estimators when conducting event studies on thinly traded stock exchanges is
examine more closely in the papers (Bartholdy, et al., 2007) and (Maynes & Rumsey, 1993)31. The authors of
these papers also find that due to many thinly traded stocks the estimators in their analyses become biased
unless adjustments are made. This again suggests that before adjustments are made, any conclusion on the
relationship between MES and the realized return during the crisis needs to be taken with a grain of salt
32 The financial institutions that are left out are Bonusbanken (Denmark) and Klepp Sparebank (Norway)

Page 41 of 128

To begin with let us take a closer look at how the observations can be increased by extending
the pre-crisis period. Remember that when daily data was used the pre-crisis period was one
year. Given that each year contains roughly 252 trading days, 252 weeks are needed to get to
the same amount of observations using weekly data as when daily data was used. This means
that the pre-crisis period needs to be around five years if MES is to be estimated based on the
same number of data as before. As a robustness test, four different time periods are
considered as possible candidates. All candidates are measured from the 5% worst market
weeks and their time period is:

MES 6yr: six years prior to the beginning of the crisis June 2001 until June 2007

MES 5yr: five years prior to the beginning of the crisis June 2002 until June 2007

MES 4yr: four years prior to the beginning of the crisis June 2003 until June 2007

MES 3yr: three years prior to the beginning of the crisis June 2004 until June 2007

The summary statistics for these four candidates, together with the MES measure that was
used when daily data was applied, shows that the mean, median and maximum level all
increase when going from daily to weekly data (see appendix 8.13). This shows that in general
a stronger tail dependency is found between market return and return of the financial
institutions when weekly data is used instead of daily data. This is in line with what was
expected based on the liquidity issue that arises when daily data is used.
To get an indication of how the frequency of data changes the relationship between MES and
Q4 -2009, Figure 21 (see appendix 8.13) shows a scatterplot of

Q4 -2009

and the four MES candidates. Based on these four graphs it does not look like changing from
daily to weekly data has strengthened the relationship between

Q4-2009 and MES

notably. The largest decreasing relationship between these variables seems though to be
found when the pre-crisis period is 3 or 4 years (see regression output in appendix 8.16).
However, none of these periods are even significant at a 10% level, so this analysis does not
give any clear indication on which pre-crisis period is preferable.

Page 42 of 128

Going from daily to weekly data seems to have improved the explanatory power of MES to
some extent, but it still falls short of reaching a sufficient significance level. The main concern
of extending the pre-crisis period is that allot of the observations that are included are
outdated which might imply that the relationship that is measured does not give an adequate
picture of how the condition was just prior to the financial crisis. An alternative way around
this issue would be to apply a weighted scheme that gives recent weeks more weight than
older weeks. This approach seems to be even more relevant now considering that the precrisis period is extended by a couple of years. Given that recent observations usually are
better for forecasting than older observations it would be useful to weight the observations
according to when they occurred instead of giving all observations equal weight like the
simple average does33. The upcoming subsection investigates closer if a weighted scheme can
improve the explanatory power of MES.

4.4.1 Weighted scheme exponentially declining weights (EWMA)

In order to emphasize larger weights to more recent returns the exponentially weighted
moving average model is applied (EWMA). The weighted marginal expected shortfall measure
is denoted by WMES and is found by applying the following formula:

4-1

where,

33

(Boudoukh, et al., 1998) actually suggest that more recent observations should be given more weight because
they are more reflective of current market conditions

Page 43 of 128

34

In this model the weights are declining exponentially as we move back through time. Actually
each weight is times the previous weight, where governs how responsive the estimate
WMES is to the most recent return observation; a small puts more weight on recent returns
and a larger puts relatively more weight on older returns35. Based on the value used by the
RiskMetrics database (Acharya, et al., 2010) also use a value of 0.94 in their exponentially
weighted moving average model36. Consequently, a value of 0.94 would seem as the most
natural choice to apply for in our case. However, this relatively large value of comes with
one clear weakness; since only 5% of the worst return weeks are considered, a relative large
value of implies that a fair proportion of the weights are distributed to the remaining 95%
return weeks that are left out of the weighted average measure. For instance, if the pre-crisis
period is chosen to be the maximum length of six years, the 5% worst return weeks would
correspond to 16 weeks. With a value of 0.94 and total return weeks of 16 (n), the total sum
of weights that is applied is 0.6284 (~63%), which means that 0.3716 (~37%) of the weights
are distributed to the 95% of return weeks that are omitted37. Not only does this imply that a
large proportion of the weights are omitted, but also that condition

does not hold. As a

result, in order to make sure that a larger proportion of the weight density is considered,

34 Condition

is included to make sure that the weights sum to unity. In order to make sure this condition is
fulfilled the algorithm has been constructed such that if there are some returns in the pre-crisis period that are
missing (often due to the fact that the financial institution has not yet been listed), the weights that should be
used on these returns have been summed up and distributed equally onto the weights of the other returns. See
appendix 8.14.1 for a closer description on how this algorithm is constructed.
35 See appendix 8.14.2 for a mathematical description on the relationship between and the weights of the
returns. This appendix also gives a graphical illustration of how the weights are exponentially declining as older
returns are considered
36 The RiskMetrics database, which was originally created by J.P. Morgan, found that across a variety of different
market variables a value of 0.94 gives a forecast of the variance rate that come closest to the realized variance
rate (Hull, 2010).
37 The total sum of weight that is applied is found by setting = 0.94, n = 16 and applying the formula from
equation 4-1:

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more weight must be allocated to recent returns, and therefore a lower value than 0.94 is
needed for

38.

To get an idea of which would be the most appropriate, given the number of return weeks
that are provided from the different pre-crisis periods (n), the equation from condition

is

estimated for given different n values:

4-2

This equation can be solved using optimization software that is available in programs such as
Excel or Mathlab39. Table 5 below presents the values that satisfy equation 4-2 given the
different pre-crisis periods. The table shows that given the low number of return weeks that
are considered (n) the values are considerably lower than the 0.94 value that is used by
(Acharya, et al., 2010). The four values are somewhere in the range of 0.42 to 0.64
depending on which pre-crisis period that is considered. One alternative would be to choose a
value that is in this range and use it for all time periods, while another alternative would be
to use the four different values separately for each time period. Using the latter alternative
might generate the best estimation, but it might also be a case of over fitting since it
specifies a value for each pre-crisis period and does not provide a very general suggestion of
which value of would be the most appropriate to use. A more parsimonious approach would
therefore be to use one value for all pre-crisis periods. It seems natural to choose this one
value based on the range estimated by the (0.42 to 0.64). However, considering that
practitioners often use a value of 0.94 this range seems to be at the lower end of what is
usually applied and might indicate that such a low value would overestimate the weights on
recent returns. Taking this into consideration, the largest value among the estimated values,
0.64, has been rounded up to 0.7 and used for all pre-crisis periods. In order to test if a value
of 0.7 returns a sufficient level of the total weight density, given the different pre-crisis
38

Appendix 8.14.3 illustrates graphical how much density is omitted when = 0.94 compared with when = 0.7
that satisfies equation 4-2

39 In this case the Solver function in Excel has been used to estimate the value of

Page 45 of 128

periods, Table 5 shows the total weights for the different pre-crisis periods when

. This

computation demonstrates that almost the entire weight density is considered for all precrisis periods, illustrating that 0.7 is a reasonable choice for . For comparative reasons the
total weights for the pre-crisis periods when

are also presented in Table 5. The

difference between these two sums is clear, which again supports the fact that a lower value
than the one used in (Acharya, et al., 2010) seems more reasonable to use in our case.
Table 5: Finding the value for different pre-crisis periods
Pre-crisis period
6 year

5 year

4 year

3 year

16

14

11

0.64

0.60

0.53

0.42

, when

1.00

0.99

0.98

0.94

, when

0.63

0.58

0.49

0.39

5 % worst weeks (n)

Table 5: Overview of how

is found for different pre-crisis periods

Using a value of 0.7, WMES is computed for all financial institutions and all pre-crisis
periods using the formula stated in equation 4-1. Figure 24 (appendix 8.15) shows that the
downward relationship between

Q4-2009 and WMES appears to be stronger than

when MES was applied (see Figure 21, appendix 8.13), which is also supported by the
regression output in table in appendix 8.16. In fact the regression output shows that the
WMES is significant at a 10% significance level when a pre-crisis period of 4 or 5 years is
considered and significant at a 5% level when a pre-crisis period of 3 years is considered40.
To put the performance of this measure in perspective, WMES is also computed using a
different percentile level than the 5% used by (Acharya, et al., 2010). In appendix 8.16
Q4-2009 is regressed against WMES at the 10% and 15% level to investigate if a
change in the percentile level leads an even better prediction. It appears that changing the
percentile level does not achieve a significantly better result when considering the adjusted

40

Even though this is still a very simply model, the significant negative sign on WMES indicates that the marginal
expected shortfall, that is measured pre-crisis, did have an adverse effect on the realized return that the financial
institutions experienced during the financial crisis. This finding therefore supports WMES being used as an exante measure to estimate the expected return should a systemic event occur

Page 46 of 128

s. Moreover, when only considering the estimates that are significant at a 5% level, the
coefficients of WMES are consistently estimated in the range between -1.9 and -1.5 indicating
that choosing one percentile level over the other does not have a significant impact on the
estimated coefficient. Since these alternative percentile levels do not seem to improve the
predictive power in a notably way, the 5% percentile level is left unchanged and kept as the
preferred one in this thesis.
This subsection has presented an alternative method to the simple average approach that has
previously been used to compute the MES. By using an exponentially declining weights
scheme that gives recent returns a larger weighting, this alternative method has proven to
provide a stronger link between the MES and RSES than previously found. (Acharya, et al.,
2010) also test whether other measurements methods offer a better estimate of MES than the
simple average approach. Among the methods they test is the EWMA model and, in line with
the findings of this thesis, they also find that this method performs better than the simple
average approach41.
In order to put the explanatory power of WMES in perspective, WMES with 3 years of
historical data is compared against the explanatory power of the risk measures that are
presented in subsection 3.2.1 (LVG, ES, Volatility and Beta). As the regression table in
appendix 8.17 shows, these ex-ante alternative risk measures do a fairly good job of
explaining the ex-post return during the crisis. All these alternative risk measures are
significant at the 1 % level, except ES which is significant at the 10 % level. However, even
though the difference is small, WMES still has the largest adjusted

out of these risk

measures, closely followed by Beta. In the interest of the linear regression model presented in
equation 2-12 the leverage ratio is included together with WMES as explanatory variables in
models 7 to model 11 in the regression table in appendix 8.17. As with (Acharya, et al., 2010)
the leverage ratio LVG is found to be significant, but the sign of the cofficient is positive when

41

Beside the EWMA model, (Acharya, et al., 2010) also test the performance of a dynamic conditional
correlation (DCC) model (see (Brownless & Engle, 2012)). After testing these alternative methods to compute
marginal expected shortfall, they conclude by stating:These results suggest there is some value to explore more
sophisticated methods for estimating MES and to including the most recent data in estimates. (Acharya, et al.,
2010, p. 25)

Page 47 of 128

a negative sign is expected42. Other leverage ratios are also tested, but none of them are found
to be significant at a 5 % level. Therefore, in contrast with the findings of (Acharya, et al.,
2010), the leverage ratio in the regression model presented in equation 2-12 is not found to
be significant when the data sample of this thesis is applied43.
Considering the findings in this subsection the EWMA model with

and weekly data of

3 years is chosen as the preferred model to compute the MES moving forward44. This is in
contrasts to (Acharya, et al., 2010) which use a simple average together with daily data to
compute the MES for their main analyses. Following the model presented in section 2, the next
section demonstrates how this measure for MES can be used as an ex-ante measure when
measuring systemic risk in the financial sector in Denmark.

5 Measuring systemic risk

This section looks closer at the systemic risk of the financial institutions in Denmark45. By
combining the MES measure that was presented in the previous section with the systemic risk
model presented in section 2.4, the

measure can be computed for the financial

institutions in the sample. Based on this computation the total systemic risk can be found
(

), together with the relative systemic risk that each financial institution possesses

). The systemic risk level is presented over the period 2006-2013. Given that some

financial institutions fall out of the sample (default) while others are included at a later stage
(go public late in the period), it varies how many financial institutions are included each year.
However, over the time period considered systemic risk is measured on 60 different financial
institutions in Denmark.

42

It is expected that a larger leverage ratio ex-ante would lead to a larger equity decrease during the crisis
See appendix 8.17 for a description of the leverage ratios that have been applied
44 Appendix 8.18 gives a complete overview of WMES for all financial institutions
45 In this analysis the foreign banks SEB, Handelsbanken and DNB Bank have been excluded. However,
appendix 8.21 shows the same analysis after including these financial institutions
43

Page 48 of 128

Table 6 (page 50) gives an overview of SRISK for financial institutions in asset group 1 and
246. Following the Basel Accords the minimum capital requirement is set to 8% (i.e., k = 8%).
There are a few remarks from this table that are worth highlighting. Firstly, as expected the
systemic risk in Denmark is highly concentrated around two financial institutions; Danske
Bank and Nordea. This concentration will be analyzed more closely later in this section.
Secondly, since SRISK gives an estimate for how much capital injection is needed for a
financial institution to overcome a crisis, it can be used as a standpoint when estimating the
cost that the system will suffer should the financial institution default. To illustrate this with
an example; it is well known that the 9th largest bank in Denmark, Vestjysk Bank, has suffered
heavily lately and the media is already talking about a potential default (see, for instance,
(Heltoft, 2014) or (Sixhj, 2014)). The table shows that the estimated bailout amount for
Vestjysk Bank is roughly 1.8 billion DKK as of end 2013. To verify the reliability of this
amount, the SRISK measure can be compared against the estimated capital injection that has
already been used on financial institutions that have defaulted. This exercise is performed
later in this section. Finally, Table 6 shows that the insurance companies, Topdanmark and
Tryg, have not possessed any systemic risk during the 2006-2013 period that is considered in
this table. This indicates that in order to sharpen the monitoring of systemic risk the main
focus should first and foremost be on the banks and not so much on the insurance
companies47.

46

Given the size of financial institutions in asset group 3, there is not much systemic risk found in this group,
and therefore they have been left out of the table. However, appendix 8.19 presents the same table only where
asset group 3 also is included
47The regression output table in appendix 8.17 also shows that the insurance companies have around 26 to 39
percentage points lower realized SES depending on which regression model is considered. Also, the average
realized return during the crisis period was 27 percentage points larger for the insurance companies than for the
banks. It should be emphasized that the sample only contains two insurance companies and therefore any
general conclusions should be taken with caution

Page 49 of 128

Table 6: Systemic risk by financial institution

SRISK (million DKK)
Financial institution
Danske Bank
Nordea
Jyske Bank
Nykredit
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank Danmark
Sparbank
2010
Roskilde Bank
Fionia Bank
Forstdernes Bank
Ringkjbing
Tryg
Landbobank
Topdanmark

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2
G2

2006
96,141
40,532
546
414
415
118
-

Q22007
128,793
69,579
2,415
94
161
-

2007
155,279
65,133
6,075
742
643
283
213
606
-

2008
265,304
232,252
15,909
14,717
10,741
4,256
2,225
2,715
2,658
1,439
1,207
4,055
2,274
942
679
-

2009
215,418
209,199
12,760
11,122
9,272
3,537
2,003
2,882
1,981
1,471
965
69
925
-

2010
217,705
241,132
11,205
10,636
8,068
3,414
2,162
2,471
1,935
2,097
892
-

2011
239,591
330,899
16,859
13,260
8,693
4,046
2,048
2,456
895
-

2012
226,391
268,637
13,750
10,483
7,317
3,219
2,193
1,420
786
-

2013
191,653
198,804
7,792
6,196
4,526
1,759
-

Table 6: Systemic risk (SRISK) of financial institution presented as a yearly overview. This table only presents the financial
institutions from asset group 1 and 2, but appendix 8.19 gives a complete overview for all asset groups

As previously stated, and what is also demonstrated in Figure 9, the systemic risk in the
financial sector in Denmark is highly concentrated around Danske Bank and Nordea 48. These
financial institutions must therefore be labeled as the systemically important financial
institutions (SIFIs) in Denmark. Based on the data description provided in section 3.2 it was
already clear that the financial sector in Denmark is very concentrated, and therefore this
result should not come as a surprise49. The left hand graph in Figure 9 shows that the total
SRISK in the system jumps sharply by the end of 2008 after the crisis makes its serious impact
on the economy. By the end of 2011 the total systemic risk peaks reaching an estimated level
of 624 billion DKK. This amount represents the total amount of capital that the government
would have to provide to bailout the financial system should a crisis occur at this point50. To
put this number in perspective, the GDP of Denmark was 1783 billion DKK the same year,
which means that the price tag of a bailout of the financial system in Denmark was in 2011

48

Only financial institutions from asset group 1 are presented in Figure 9. However, appendix 8.19 and 8.20 give
a complete overview of the risk measures for all financial institutions
49 In addition to Danske Bank and Nordea, The Committee on Systematically Important Financial Institutions also
identifies Nykredit, Jyske Bank, BRFkredit and Sydbank as systematically important financial institutions in
Denmark (Mller, et al., 2013). See section 1.3 for a description on which method the committee uses to identify
SIFIs
50 A crisis is defined as a market drop of 40% over a six-month period

Page 50 of 128

approximately one-third of Denmarks annual GDP51. After 2011 the systemic risk decreases
reaching an estimated level of 413 billion DKK by the end of 2013. This decrease means that
the systemic risk level today (end of 2013) is roughly two-thirds of the level it was when the
systemic risk was at its highest during the crisis. This level of systemic risk corresponds
approximately to one-fifth of the annual GDP in Denmark. Even though the systemic risk level
has steadily begun to decrease, the systemic risk is still roughly twice as large as it was before
the crisis. The graph on the right hand side of Figure 9 shows the relative systemic risk that
each financial institution possesses (

). This graph shows that by the end of 2006,

shortly before the crisis hit, Danske Bank possessed 70% of the total systemic risk and Nordea
29%. This means that these two financial institutions alone contributed to 99% of the
systemic risk in the system. Interestingly, before the crisis Danske Bank possessed more
systemic risk of these two, whereas the period after the crisis has left these two competitors
on almost even ground. Digging deeper into the financial statement reveals that this flattening
out is mostly driven by the fact that Nordea has taken on relatively more debt than Danske
Bank during the period after the financial crisis, and this has caused the systemic risk level of
Nordea to increase relatively more than the systemic risk of Danske Bank52.

Figure 9: Left: Shows SRISK and total SRISK by financial institution and year. Right: Shows SRISK% by financial institutions
and year. Only financial institutions from asset group 1 are presented in these graphs. However, appendix 8.19 and 8.20 gives
a complete overview for all the financial institutions in the sample
51

The estimated share varies of course from year to year. Over the period considered the total systemic risk is
estimated to somewhere in the range of 10 to 35 percentage of Denmarks annual GDP. The GDP of Denmark is
found on Statistics Denmarks website: www.dst.dk/en. See appendix 8.22 for a complete annual overview
52 See appendix 8.23

Page 51 of 128

In order to test the validity of the computed SRISK measures, two robustness tests are
performed. Firstly, since NYU Stern Volatility Institution uploads SRISK measures for selected
financial institutions on a monthly basis on their V-Labs website, it is possible to compare the
SRISK measures computed in this thesis with the SRISK measure that they upload53. Secondly,
given that SRISK represents the total amount of capital that a financial institution needs to
raise in case of a crisis event, the 2007-2009 financial crisis is used as a case study to test if
this statement holds for selected financial institutions.

5.1

Validity of SRISK

Since V-Labs website only uploads SRISK measure for large global financial institutions, the
majority of the financial institutions in Denmark are not included on this list. However,
Danske Bank and Nordea are both included on this list and therefore it is possible to do a
comparison of the SRISK measure provided by V-Lab and the computed one in this thesis.
Notably, the SRISK measure presented on V-Labs website is computed somewhat differently
compared to the approach used in this thesis. The difference is that MES is calculated using a
multi-period dynamic approach that uses underlying GARCH and DCC models to estimate
conditional volatility and conditional correlation, which are used to simulate the cumulative
returns for the financial institution54. However, as this subsection also demonstrates, the
difference in outcome from these two approaches is to some extend negligible.
The solid line in Figure 10 below represents the SRISK measure that is computed in this
thesis, while the dashed line represents the SRISK measure that is taken from V-Labs website.
This figure clearly illustrates that the SRISK measures provided from these two sources are
very similar across both financial institutions. Even though (Brownless & Engle, 2012) speak
in favor of using a dynamic approach to estimate MES, this example illustrates that using an
historical approach, with the correct specifications, gives almost identical results55.

53

The SRISK measures are uploaded to the following website: http://vlab.stern.nyu.edu

See (Brownless & Engle, 2012). For a comprehensive description of GARCH and DCC models see (Engle, 2002)
and (Engle, 2009), respectively
55 (Brownless & Engle, 2012) test the dynamic approach against a historical approach that computes MES as a
simple average based on two years of data. As section 4 also demonstrates, using a simple average does not
54

Page 52 of 128

Figure 10: Left: the solid line represents the thesiss computed SRISK for Danske Bank, while the dashed line is SRISK for
Danske Bank that is taken from V-Labs website. Right: the solid line represents the thesiss computed SRISK for Nordea,
while the dashed line is SRISK for Nordea that is taken from V-Labs website. The USD/DKK exchange rate required to be able
to compare the series has been downloaded from the Danish National Bank (www.nationalbanken.dk)

The second robustness test investigates if the capital injection that SRISK predicts is needed
for a financial institution to overcome a crisis corresponds to the capital injection that is
observed on the market when a real financial crisis hits. It can be difficult to observe exactly
how much capital a financial institution needs to raise in order to overcome a crisis; a
surviving financial institution might have received a larger injection than needed to survive,
while a defaulting financial institution has apparently received a too small amount to survive
(assuming that they have spent the capital they have received reasonably). Therefore, the
observed capital injection will most likely be biased somewhat. However, in an attempt to
compare the prediction of SRISK to the observed capital injection, the 2007-2009 financial
crisis is used as a case study to investigate the match between observed capital injection, that
defaulted financial institutions received in an attempt to overcome the crisis, and the
predicted capital that was needed represented by SRISK. The comparison is made for
defaulted financial institutions which default process is described as a case study in (Rangvidudvalget, 2013). These financial institutions are Roskilde Bank, Amagerbanken, Max Bank,
provide the best estimation, and therefore more advanced techniques are needed. By emphasizing more recent
observations the EWMA model presented in section 4 proved to generate significantly better results

Page 53 of 128

Fionia Bank and Eik Bank. Among the information that is found in these case studies is an
estimate of the overall capital that was provided by creditors and the Danish state in a final
attempt to avoid that the financial institution defaulted. It is this estimated amount of injected
capital that is compared against the SRISK measure.
Figure 11 (page 55) shows the capital injection that has been taken from (Rangvid-udvalget,
2013) and the SRISK measures that have been computed (SRISK and SRISK max) for these
financial institutions56. As the figure shows the relationship between the observed capital
injection and SRISK varies significantly from case to case. The observed capital injection
seems to have the strongest link to the SRISK measure for Amagerbanken, Eik Bank and to
some extent Max Bank. These cases show, compared to the others, a relatively strong link
between the observed capital injection and the last computed SRISK measure (labeled SRISK).
Based on the economical intuition behind the SRISK measure, it is also expected that the last
observed SRISK measure is the amount that resembles best how much capital injection is
needed in order to avoid that the financial institution defaults. The other cases show that this
link is not as strong when considering the link across all financial institutions. Furthermore,
considering that the capital injection used in this example is downward biased (since only
financial institutions that defaulted are considered), this robustness test clearly indicates that
SRISK underestimates the capital that is needed for a financial institution to overcome a crisis.
On the other hand, given that the 2007-2009 financial crisis was exceptionally severe the
observed capital injections that have been used in this robustness test might be
overestimating the capital needed to overcome a more normal crisis that SRISK is
considering. Remember that the SRISK measure defines a crisis as a market drop of 40% over
a six-month period. As a comparison it can be mentioned that the maximum that the Danish
KAX index fell during the 2007-2009 financial crisis was 62%, and this was over one and a
half years period57. This shows that both the magnitude and length of the 2007-2009 financial
crisis is considerably more severe than what is considered when computing SRISK. Given that
SRISK considers the severity of a crisis that is not as grave as the 2007-2009 financial crisis,

56

SRISK is taken as the last observed value of SRISK before the financial institution defaulted, while SRISK max is
identified as the largest SRISK measure during the period 2006-2013
57 The index high was 504.82 (10/11/2007) and the index low was 193.89 (3/9/2009)

Page 54 of 128

the case of Amagerbanken, Eik Bank and Max Bank show that, its measure provides a useful
starting point when estimating how much capital is needed to overcome a normal crisis.

Figure 11: The SRISK max measure represents the largest SRISK that the financial institution had over the period 2006-2013.
SRISK is the last observed SRISK measure that the financial institution had before filing for bankruptcy. Both these values can
be found in the table represented in appendix 8.19. Capital injection represents the contribution of capital that is provided
either directly by the government or through capital that the financial institution raises on the financial market. These values
are taken from (Rangvid-udvalget, 2013)

To summarize the robustness tests made on SRISK it can be concluded that SRISK serves its
purpose fairly well. The first test showed that the computed SRISK measure in this thesis is
very much in line with V-Labs predicted value. This shows that a historical approach, with the
correct specification, gives almost identical results as when a dynamic approach is used to
estimate MES, which illustrates the consistency of SRISK. The second test showed that SRISK
has a tendency to underestimate how much injected capital is needed in order to bailout the
financial institution. However, when considering a more normal crisis, SRISK demonstrated
that it can be a useful starting point when estimating how much injected capital the financial
institution needs to overcome the crisis. This information can be helpful both for the
government and stakeholders when assessing which condition the financial institution is in.
SRISK measures the systemic risk of a financial institution in absolute terms. An interesting
extension of this measure would be to estimate how much systemic risk a financial institution
possesses compared to its size. Since the financial sector in Denmark is highly dominated by

Page 55 of 128

two players, their systemic risk is overshadowing the systemic risk that is found for other
players in the sector. Even though a default event by one of these two players would have a
catastrophic effect on the system, it is clear that the default of smaller financial institutions
can also be costly for the system. During the period January 2008 to August 2013, 62 financial
institutions defaulted in Denmark and even though none of these financial institutions
belonged to asset group 1, the overall cost that the Danish society suffered due to the 20072009 financial crisis is estimated to be around 400 billion DKK (Rangvid-udvalget, 2013). This
demonstrates that, when assessing systemic risk, it is worthwhile to also monitor smaller
financial institutions since their default event easily can transmit into a systemic crisis of
larger scale. For this purpose the risk tools presented by (Brownless & Engle, 2012) are
extended in this thesis to account for the systemic risk that each financial institution
possesses after controlling for the size of the financial institutions. These extended
monitoring tools are denoted RSRISK and RSRISK%.

5.2 RSRISK and RSRISK%

In order to control for the size of the financial institution RSRISK takes into account the level
of assets that the financial institution holds compared to the overall level of assets in the
system. This is done by scaling

with the relative level of assets that financial

institutions i holds:

5-1

where n is the number of financial institutions in the system58. The expression in equation 5-1
indicates how much systemic risk, relative to size, each financial institution possesses.
However, this measure is not so practical and easy to interpret in absolute terms, and
therefore it can be more informative to analyze it in proportion to the overall RSRISK of the
system:

58

is computed as the sum of debt and market value of equity

Page 56 of 128

5-2

By analyzing

as a share of the overall RSRISK it is easier to quickly indentify the

financial institutions that possess abnormal systemic risk in relation to their size. In order to
pinpoint these financial institutions even more efficiently,
difference from the average

is also computed as

at any given time t:

5-3

where
institution j has positive

is a dummy variable that takes on unity whenever financial

. Since RSRISK% is already normalized for size it makes

sense to compare its measure directly across financial institutions in order to pinpoint the
financial institutions that have abnormal systemic risk relative to their size.
The left hand graph in Figure 12 (page 58) is similar to the right hand graph in Figure 9 (page
51), except that it shows the share of RSRISK% instead of the share of SRISK%. As before, the
financial institutions belonging to asset group 1 are represented directly, while the financial
institutions belonging to asset group 2 and 3 are consolidated under the category other. By
comparing Figure 9 with Figure 12 it is clear that the share of the financial institutions in the
other category has increased significantly after controlling for the relative size of the
financial institution. Especially, during the turmoil of the 2007-2009 financial crisis there is a
clear shift in the allocation of shares; by the second quarter of 2007 the other financial
institutions had 9 percent of the systemic risk after controlling for size, while this number had
increased to 81 percent by the end of 2008 and has stayed roughly at this level ever since.
This demonstrates that after controlling for the relative size of the financial institution some
systemic risk is also found among the smaller financial institutions.

Page 57 of 128

Figure 12: Left: Shows SRISK% by financial institutions and year. Only financial institutions from asset group 1 are presented
in these graphs, while financial institutions from asset group 2 and asset group 3 are consolidated under other. However,
appendix 8.24 gives a complete overview of RSRISK% for all financial institutions in the sample

The graph on the right hand side of Figure 12 shows which financial institutions, among the
other category, are contributing with the most RSRISK% for each given year59. The first
thing that strikes is that all the financial institutions presented on this graph have already
defaulted except Vestjysk Bank. As previously stated though, Vestjysk Bank has been
struggling recently and speculations have already been raised whether it will be able to
overcome a potential default in the nearest future60. Another interesting remark is that the
increase in RSRISK% occurs sometime before the actual default event of the defaulting
financial institution. For instance, three years prior to Fionia Banks bankruptcy in February
2009, its RSRISK% measure had reached its maximum level of 18 percent and had stayed
consistently high until the point of bankruptcy. The same story holds for Amagerbanken; the
banks RSRISK% measure reached its maximum level of 12 percent by the end of 2007 and it
stayed consistently high until the bank was forced to file for bankruptcy in February 2011.
And lastly, the RSRISK% measures for Roskilde Bank, Eik Bank, Max Bank and Sparekassen

59

In 2006, second quarter of 2007 and in 2009 Fionia Bank had the largest share of RSRISK among the other
financial institutions. Amagerbanken was leading this field in 2007, Roskilde Bank in 2008, Eik Bank in 2010,
Max Bank in 2011, Sparekassen Lolland in 2012 and Vestjysk Bank in 2013. See appendix 8.26 for a complete
overview containing the exact values for each series
60 See for instance (Heltoft, 2014) or (Sixhj, 2014)

Page 58 of 128

Lolland were all steadily increasing and reached a relatively high level prior to their default
event that took place in August 2008, September 2010, October 2011 and January 2013,
respectively. The case of Vestjysk Bank is of course still unknown. The fact that the overall
economy has recovered to some extent and is in general in a much better condition, leaves
Vestjysk Bank in a better situation than its already defaulted competitors. On the other hand,
the RSRISK% measure that is presented in Figure 12 does not speak in favor of Vestjysk Bank
overcoming a potential default, and therefore it seems reasonable that regulators already now
are monitoring the financial institution more closely. The red dotted line represents the
average RSRISK% when only considering the other financial institutions. Interestingly, this
average decreased and stayed relatively low during the crisis period, even though the left
hand graph on Figure 12 shows that on a group level the other gained relatively more
RSRISK% during this period. Hence, the decrease in average RSRISK% among the other
financial institutions can be explained by the considerable increase in numbers of other
financial institutions that possessed some systemic risk during this period. For instance, the
number of other financial institutions that possessed some systemic risk in 2007 was 5,
whereas this number had increased to 29 in 2008.
The examples in this subsection demonstrates that even though RSRISK% is a measure of how
much systemic risk a financial institution holds in relation to its size, it seems also to provide a
fairly good estimate for the overall condition of the financial institution. This might not be so
surprising since a financial institution that is initially distressed is likely to also show bad
performance when a stress test like RSRISK% is conducted. In this sense it seems natural that
the overall condition of the financial institution and its magnitude of systemic risk are related
to some extent.
Given that RSRISK% has shown good capabilities of identifying financial institutions that are
stressful, an interesting exercise would be to use this tool to evaluate the current condition of
the financial institutions in the sample. A complete list of the financial institution and their
RSRISK% measure is found in appendix 8.24, while Table 7 below only presents the financial
institutions that have a RSRISK% measure that is larger than the average RSRISK% in 2013
(i.e., the financial institution that have a positive DA_RSRISK% in 2013). In order to put this
evaluation into perspective, the identified financial institutions presented in Table 7 are
Page 59 of 128

compared to the risk index that the Danish corporate consulting firm NIRO Invest releases
every year. This index builds on 19-21 key financial indicators (e.g., equity ratio, solvency
ratio, annual results and loan growth) that are consolidated into one number that reflects the
overall risk of the financial institution. As a rule of thumb a financial institution that has a risk
index that is larger than 475 is considered to be especially risky. The second column of Table
7 presents the NIRO index based on financial numbers from 201361. The table shows six of the
twelve financial institutions that have been identified to have an abnormally large RSRISK% to
also have a NIRO index larger than 475. If the NIRO index threshold is decreased to 450 both
Totalbanken and Salling Bank could also be considered especially risky, which means that
two-thirds of the financial institutions in the table fall under this category. This shows the
strength of RSRISK% to be able to identify the financial institutions that not only possess a
large fraction of systemic risk relative to their size, but also to highlight those financial
institutions that are financially distressed and need to be closely monitored by regulators.
Table 7 : The financial institutions with positive DA_RSRISK% as of end 2013
DA_RSRISK%
Financial institution
Vestjysk Bank
stjydsk Bank
Svendborg Sparekasse
Danske Bank
Vordingborg Bank
Hvidbjerg Bank
Danske Andelskassers
Salling
Bank Bank
Sparekassen Faaborg
Nordea
Vestfyns Bank
Totalbanken

NIRO
Index
510
532.5
342.51)
325
522.51)
512.5
517.5
452.5
512.51)
337.5
3301)
472.5

Asset
group
G2
G3
G3
G1
G3
G3
G3
G3
G3
G1
G3
G3

2006
0.00%
0.00%
0.00%
27.26%
0.00%
0.00%
0.00%
0.00%
0.00%
2.49%
0.00%
0.00%

Q22007
0.00%
0.00%
0.00%
25.02%
0.00%
0.00%
0.00%
0.00%
0.00%
6.27%
0.00%
0.00%

2007
0.00%
0.00%
0.00%
15.55%
0.00%
0.00%
0.00%
0.00%
0.00%
0.80%
0.00%
0.00%

2008
1.13%
0.00%
0.00%
1.32%
0.00%
0.00%
0.00%
0.00%
0.00%
0.77%
0.00%
0.01%

2009
1.59%
0.00%
0.00%
2.13%
0.00%
0.00%
0.00%
0.00%
0.00%
0.94%
0.00%
0.24%

2010
1.91%
0.40%
0.00%
1.98%
0.00%
0.00%
0.00%
0.00%
0.00%
0.94%
0.00%
1.05%

2011
1.54%
0.80%
0.00%
1.36%
0.00%
0.10%
0.00%
0.19%
0.00%
0.75%
0.00%
1.50%

2012
2.13%
1.59%
0.00%
2.00%
0.00%
1.70%
0.71%
1.13%
0.49%
1.07%
0.00%
1.08%

2013
3.45%
3.43%
3.19%
2.87%
2.63%
2.41%
2.20%
1.48%
0.83%
0.68%
0.47%
0.21%

Table 7: The table shows the financial institutions that have a positive DA_RSRISK% as of end 2013. 1) NIRO Index values
from 2012 instead of from 2013. The reason is that these financial institutions merged or got acquired during 2013 and
therefore 2013 values have not been released. See Table 22 in appendix 8.27 for a closer description

Since RSRISK% in its essence is measuring systemic risk, it is not so surprising that it still
highlights the dominant financial institutions in the system, Danske Bank and Nordea, even
after controlling for their size. Notice that the NIRO index does not underline these financial
institutions as being especially risky since they, viewed individual and as separate entities, are
well-run and safe financial institutions. The reason that RSRISK% still highlights these
61

Some of the financial institutions have been acquired during 2013 and therefore their NIRO Index has not
been released for 2013. In this case the NIRO Index for 2012 has been used instead. See appendix 8.27 for a
closer description of the NIRO Index as well as a total overview of the index values for 2011, 2012 and 2013.

Page 60 of 128

financial institutions reveals the difference between the individual risk measures (such as the
NIRO index that builds on financial ratios) and the systemic risk measures presented in this
thesis; while the individual risk measures serve well when assessing the robustness of the
financial institution they come short of capturing the interconnectedness of the financial
institution with the system. As a result, each individual financial institution can appear to be
safe while the links between them mean that the system as a whole is vulnerable. Therefore,
when assessing systemic risk it is important to not look at the risk of the financial institution
in isolation, but rather from a broader perspective that incorporates both financial data and
market data such that potential contagion effects are also taken into account. It is this
perspective that the systemic risk measure of this thesis relies upon.
This section has demonstrated that the systemic risk measures SRISK and SRISK% are useful
tools when assessing systemic risk among the financial institutions in absolute terms and are
useful when identifying the systematically important financial institutions. When
investigating systemic risk among the smaller financial institutions it can be useful to consider
their systemic risk in relation to their size. For this purpose RSRISK and especially RSRISK%
were found to be helpful tools. In addition, these tools were also shown to provide good
insights on the general robustness of the financial institutions by being able to identify the
smaller financial institutions that initially are showing signs of financial distress. Taking all
this into consideration, these risk measures have proven that they are useful tools to be
considered by regulators and stakeholders. However, as most risk tools, these risk tools have
of course their shortcomings and potential room for improvement. The upcoming sector
discusses how the model can be improved and examines how systemic risk can be mitigated.

6 Implementation and discussion

Built on the model presented in the previous section, this section looks closer at how this
model can be implemented and used by regulators to mitigate systemic risk. By investigating
different scenarios, a deeper understanding of the underlying variables of the model is
achieved. This understanding can be used to measure the impact on systemic risk that a given
change in one of the variables might cause. In addition, this section also provides a critical
assessment of the model that is used by trying to identify relevant economical factors that

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might be omitted under the current framework, but could be included by making certain
adjustments. This section builds on the proposed risk models that are introduced by
(Acharya, et al., 2010) and (Brownless & Engle, 2012), and investigates how this models can
be extended and improved.

6.1 Estimating the minimum level of capital

By using the framework of the model, assume that regulators are interested in estimating
what minimum level of capital is required in order to keep the systemic risk under a certain
threshold. As a concrete example, assume that regulators impose that that the systemic risk
should not exceed k times the market value of equity at any point62. Impose this inequality to
equation 2-14 (on page 19) and rewrite the expression in terms of debt over market value of
equity:

6-1

where k is equal to 8 percent. To put this ratio in perspective the actual debt-to-equity ratio of
financial institution i is divided with

. This expression reveals by which inverse factor

the actual debt-to-equity ratio needs to change in order to achieve the maximum level of
permitted systemic risk. For instance, if this factor is found to be two, the actual debt-toequity ratio is twice as large as

and therefore it needs to be diminished by one half of

its current level in order to sustain the maximum level of permitted systemic risk 63.
Obviously, a factor of one implies that the financial institution has reached its maximum
permitted level, and a further increase in its debt-to-equity ratio, all things equal, would imply
that it will exceed the upper boundary of its permitted possession of systemic risk. On the
62

This might be a rather ambitious target, but for illustrative purposes this example is presented in its simplest
form. If a different target is preferred this target can easily be implemented instead
63 This can be achieved by either lowering the debt to one half of the previous level or double the market value
of equity. A third option is of course a mixture of decreasing the debt level and increasing the market value of
equity

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other hand, if this factor is smaller than one the financial institution has a smaller debt-toequity ratio than is required to obtain the maximum level of permitted systemic risk.
The left hand graph in Figure 13 (page 64) shows the median ratio between the actual debtto-equity ratio and

for all financial institutions (All), for financial institutions in asset

group 1 (G1), for financial institutions in asset group 2 (G2) and for financial institutions in
asset group 3 (G3)64. Up until end of 2007 the actual debt-to-equity ratio of most financial
institutions was at a reasonable level (below or close to one). However, after this point the
series start to increase, especially for financial institutions in asset group 1 and asset group 2.
By end of 2008 the median financial institution in asset group 1 was approximately seven
times as leveraged as required for it to hold the maximum level of systemic risk that was
permitted. For the median financial institution in asset group 2 this level was closer to five-six
times, whereas the median financial institution in asset group 3 was slightly below the
allowed threshold. This shows that during this period the financial institutions were highly
overleveraged compared to their systemic risk, and in order to decrease the overall risk of the
system a much stricter capital requirement was needed. Today the condition looks much less
severe as the debt-to-equity ratio seems more reasonable compared to the systemic risk that
is found in the current system. The graph on the right hand side shows that the ratio between
the actual debt-to-equity and

reached an astounding level of 21 for Danske Bank in

2008 and 25 for Max Bank in 2011. These examples illustrate how overleveraged some of the
financial institutions were compared to the systemic risk that they possessed during this
period (see appendix 8.28 for a complete list containing comparison for all financial
institutions). The graph also shows that the struggling financial institution, Vestjysk Bank,
needs to lower its debt-to-equity ratio by approximately one fifth of the current level in order
to reach the maximum level of systemic risk allowed in this example65.

64

The reason this ratio is presented through the median value and not, for instance, by the average value, is
because the financial institutions that have defaulted have extremely large values for given years and this
distorts the overall picture. To avoid this distortion the median value is applied instead
65 The debt-to-equity level of Vestjysk Bank by end of 2013 is 34. This means in order to completely mitigate the
systemic risk its debt-to-equity level should be approximately 7

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Figure 13: Left: The figure shows the median ratio between the actual debt-to-equity and
for all financial institutions
(All), asset group 1 (G1), asset group 2 (G2) and asset group 3 (G3). Right: The figure shows the ratio between the actual
debt-to-equity and
for selected financial institutions. Danske Bank is taken from asset group 1 (G1), Vestjysk Bank is
taken from asset group 2 (G2) and Max Bank is taken from asset group 3 (G3). * The y-axes represents the ratio between the
actual debt-to-equity and
. Note that the values on the y-axes differ between the two graphs.

This example illustrates how the model can be used to quantify which capital level is required
to make sure that the systemic risk is kept below a certain threshold. The threshold chosen in
this example is selected as a fraction, k, of the market value of equity, but regulators can easily
implement their own preferred threshold and investigate how this changes the required
capital level of the financial institutions. The upcoming sector investigates how a change in
the fraction of the minimum capital requirement (k) changes the systemic risk of the system.

6.2 Changing the minimum capital requirement (k)

From equation 2-6 (on page 14) it is clear that an increase in the fraction, k, of assets that
regulators or management set as minimum target level, will lower the working capital of the
financial institution66. However, this is under the assumption that none of the other variables
change should a change in k occur (the so called ceteris paribus condition). It is reasonable
to assume that a financial institution would in fact react if its working capital were to be

66

Equation 2-6 is restated here:

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lowered by trying to regain some or all of the working capital that it previously had. There are
two ways that the financial institution could regain its working capital; either it lowers its
debt level or increases the market value of equity67. Increasing the market value of equity is
probably not as easy as decreasing the debt level, since it depends on the expectation of
investors and their willingness to risk their money on the future prospect of the financial
institution. Therefore, assume that an increase in the variable k would make the financial
institution lower its debt level in order to regain its working capital. For the sake of
quantifying the effect that the change in k might have on the overall systemic risk, assume that
the financial institution wishes to regain all of its working capital such that its overall working
capital remains the same as before the change in k. To see more explicitly how a change in k
will affect the debt level, rewrite the working capital equation (equation 2-6) such that it
expresses the debt level as a function of the other variables:

6-2

Now use this expression to compute the debt level for different values of k keeping all other
variables fixed. By plugging these new values of k and debt into the expression for SRISK
(equation 2-14, page 19), a new level of systemic risk can be found, and by comparing this
new level with the old level the overall effect of k on systemic risk can be evaluated. To ease
the computation steps the expression in equation 6-2 is substituted into the expression for
SRISK such that the systemic risk can be computed directly from the change in k while keeping
all other variables fixed68:

6-3

67 Since the market value of equity is included both through a positive component and a negative component it is

not so clear how a change in this variable affects the working capital. By first rewriting the working capital and
then differentiating, it becomes clear that an increase in this variable does in fact have a positive effect on the
working capital:
,
68 See appendix 8.29 for proof

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From this expression the partial effect of a change in k can be found (conditional on SRISK
being positive):

6-4

The intuition behind this expression is clear; the absolute change in the systemic risk from a
marginal change in k depends on the market value of equity 69 (
interconnectedness (
larger

) and the

) of the financial institution. Based on the setup of this model a

means that the debt level of the financial institution needs to be lowered relatively

more when increasing k, which means that SRISK will decrease relatively more from a change
in k. The other factor can be explained through the risk of contagion since an increase in k
(decrease in debt level) will lower the absolute risk of the system relatively more when done
for the highly interconnected financial institutions.
Assume now that regulators are curious to find out how large an impact a change in k has on
the overall systemic risk of the system. Figure 14 shows how large the impact would be if the
change in k was implemented in 2007, 2009, 2011 or in 2013 (in order to make the graph
more readable only selected years are presented). As expected, the upper left hand graph
shows that the total systemic risk in the system decreases when k increases. However, as the
lower left hand graph demonstrates, the absolute impact of a change in k varies depending on
which year the change is implemented. There are two underlying components that can
explain this difference. Firstly, the total impact of k on the system is limited by the number of
financial institutions that it can affect in a given year, i.e., by the number of financial
institutions that possess some systemic risk in a given year. The more financial institutions
that possess some systemic risk, the more will be affected by a change in k, which eventually
will be reflected in the overall impact of k. As an example of this, Figure 14 shows that the
change in k would have the largest absolute effect on the overall systemic risk if it was
implemented in 2009, while it would have the lowest absolute effect if it was implemented in

69

This can be interpret as a proxy for the size of the financial institution

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2007. This difference in impact can be explained by the fact that a larger number of financial
institutions possessed some systemic risk in 2009 than in 2007, and therefore the change in k
has a much larger aggregate effect if it was implemented in 2009 than in 2007 70. Secondly, as
previously stated, the impact of a change in k depends on the level of

and

among the financial institutions in a given year. For instance, the reason that the change in k
does not have such a large absolute impact if it was implemented in 2011, is because the
market value of equity for most financial institutions has reached a very low level at this
point, and as a result the debt level will not decrease as much from a change in k as it does for
some of the other years considered.

Figure 14: Upper left: The total SRISK for different years and different k values. Lower left: The change in total SRISK when
changing k. The change is compared against the baseline value of 8 percent. Right: Shows the percentage change in total
SRISK when changing k. The change is compared against the baseline value of 8 percent.

The right hand graph of Figure 14 shows that changing k would have the largest relative
impact if it occurred in 2013. The reason for this is that the total systemic risk in the system is
comparatively low this year and fairly dispersed among the financial institutions71. This
means that changing k in 2013 has a broad impact as well as a relatively large impact since
the baseline amount of systemic risk is comparatively low this year. Given that 2013 data is
the most recent data that is included in this analysis, the best estimate of the outcome of
In 2007, 8 financial institutions had some systemic risk, while this number had increased to 30 in 2009
Out of the 60 financial institutions considered, 23 financial institutions possessed some systemic risk by the
end of 2013. For comparison this number was only 8 in 2007
70

71

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changing k today is represented by this time series. To investigate the time series more
closely, note that there exist a clear linear relationship between the change in k and the
corresponding percentage change in total systemic risk. When running a regression analysis
on this relationship in 2013, it shows that increasing k one percentage point would lead to a
decrease in the total systemic risk of half a percent. This is in other words an expression for
the semi-elasticity that exists between changing k and the effect that it has on the systemic
risk of the system. This background knowledge can be useful for regulators when deciding if
they want to change the minimum level of capital requirement, and if so, by how much. To put
some numbers to the impact of a change in k, it is found that increasing k from the baseline
value of 8 percent to 12 percent would lower the total systemic risk in the system by roughly
8 billion DKK in 2013 (see left hand graph in Figure 14). If regulators are even more
prudential and decide to increase k to 16 percent the total systemic risk in the system is
estimated to drop by 16 billion DKK in 2013. Another approach could also be to impose a nonuniform capital requirement where more stringent capital requirements are imposed onto the
systematically important financial institutions. To test the impact of imposing a non-uniform
capital requirement under the current framework, assume that k is increased to 16 percent
for all financial institutions that belong to asset group 1, but remains at the baseline value of 8
percent for all other financial institutions. The total impact on systemic risk from this change
is interestingly slightly below the impact that was found when a uniform requirement of 16
percent was imposed onto all financial institutions (the difference between these two is only
121 million DKK). This demonstrates that applying a non-uniform capital requirement
scheme seems to be beneficial since it specifically targets the financial institutions that
possess the largest systemic risk, and as a result the overall impact is almost identical as when
a uniform scheme is applied.
The possible implementations that have been presented in this section all build on extensions
of the baseline model that is presented in section 2. These implementations demonstrate how
this model can be put into practice by regulators in their struggle against systemic risk. The
upcoming subsection provides a critical discussion of this model and investigates closer
which relevant economical factors it might fail to consider in its assessment of systemic risk.
Furthermore, through this critical discussion an attempt is made to extend and improve the
current model by taking into account these economical factors.
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6.3 Extension of the model taking into account omitted relevant factors
This subsection looks to extend the model in two ways. Firstly, the current setup fails to
consider the possibility of capital savings from previous year which can be used as a capital
buffer when the market is distressed. Secondly, in times of distress it is very likely that
financial institutions look for outside funding in order to be able to settle their obligations
when they are due. A measure for how easy the financial institutions can access outside
funding through, for instance, the equity market is not a factor that is considered under the
current setup, even though this factor must be considered to be relevant when determining
how robust the financial institution is. To start off this extension of the model, consider first
the case where capital savings from previous years is an option that financial institutions can
apply.
Before a polar bear goes into hibernation it eats a large amount of food in order to store
enough energy to last through the hard winter. In the same sense it seems reasonable that
financial institutions put aside capital that they can rely on when they are facing a hard
period. In order to encourage financial institutions to put aside capital for stressful periods,
Basel III introduces the countercyclical capital buffer (Georg, 2011), which purpose is to
make sure that financial institutions build up a capital buffer in good times that can help
withstand the pressure during bad times. As a positive side benefit, it is also believed that
forcing the financial institutions to put aside capital during good times will lower the excess
aggregate credit that is provided during the upturn period which will weaken the build-up
phase of the cycle in the first place. As a result, the countercyclical capital buffer works to
smoothen out the business cycle by dampen both the upturn and downturn period72. In order
to measure the effect of letting financial institutions put aside capital for potential stressful
periods, the extension of the model builds on the setup that is introduced by the
countercyclical capital buffer. To simplify the setup, assume that each financial institution
holds a bank account at the national bank where they put aside their countercyclical capital
buffer. Each year, based on the market development, the regulators decide if the financial
institution needs to add capital to their account; if the market growth (g) is larger than the

72

To date, Switzerland and Norway are the only countries that have introduced a regulatory regime for a
countercyclical capital buffer (Bank, 2013)

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average market growth ( ) then the countercyclical capital buffer the upcoming year needs to
be at least 2.5 percent of the market value of equity73. If the account initially holds less capital
than this level of equity, the financial institution needs to add capital to the countercyclical
account such that it fulfills its minimum requirement. If the market growth (g), on the other
hand, is lower than the average market growth ( ) then the financial institution does not need
to consider putting any capital aside and may be granted the option to use some of the stored
capital to pay their obligations. Note that the fraction of market value of equity that needs to
be put aside on a given year depends on the market development the previous year. The
reason for this shift in time is that regulators need to pre-announce one year in advance in
order to give the financial institution sufficient time to put aside capital that it might need to
add to its countercyclical capital account by the end of the year. The countercyclical capital
buffer (CCB) is added to the working capital (equation 2-6, page 14) of the financial institution
in the following way:

6-5

where p is the number of years that are considered when building up the CBB,

is the growth

rate of the market at time t and is the average growth rate of the market74. It is not clear
how long the time horizon should be when building up the CBB, but in order to make sure that

73

In the Basel III amendment the level ranges from zero to 2.5 percent of the risk-weighted assets. The variation
in the level follows a linear relationship that depends on the difference between the market growth and the
average market growth. For simplicity, this thesis does not consider any range, but only a fixed level of 2.5
percent. In the setup presented in this thesis, the level is taken as a fraction of the market value of equity,
whereas the Basel III amendment uses a fraction of the risk-weighted assets. Since there is missing data on riskweighted assets for the majority of financial institutions in the sample, the capital buffer is found as a fraction of
market value of equity instead. Since the purpose of this exercise is barely to take into account the effect of
letting financial institutions store capital for later use, this difference should, however, not affect the qualitative
impact that is measured
74 The OMX C20 index is used as an indicator on market growth. This index is a market value weighted index that
consists of the 20 most traded stocks on the Danish stock market. Since the OMX C20 index contains longer
historical data than the KAX index this market index is chosen as the preferred one. The average growth rate is
computed using annual growth rate that goes back to 1990

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it has time to have a countercyclical effect, the time period is chosen to be five years, i.e.,
. Note that the market value of equity at time t is reduced by factor

if the

market development has required that some capital was needed to be stored for later use.
This is implemented in order to make sure that the capital that is put aside the previous years
is somehow reflected in the capital level today. Before investigating how this extension of the
model might affect the overall systemic risk level, the model is further extended by including a
measure for how easy financial institutions can access outside funding.
The ability of a financial institution to access outside funding depends essentially on its credit
risk as well as the general liquidity level on the market. The latter gives an indication of the
general confidence that exists on the market and is a factor that affects all financial
institutions when they are looking for outside funding. Following (Linderstrm & Rasmussen,
2011) and (De Socio, 2011) this factor is measured as the spread between the European
interbank rate, EURIBOR, and the European overnight interest rate, EONIA. Given that the
maturity on an EONIA loan only consist of one day, this rate is used as a proxy for the risk-free
rate, which means that any difference between EURIBOR and EONIA represents the general
liquidity premium that arises between unsecure and secure lending on the market75. As a
proxy for the credit risk that is associated with the financial institution, its credit default swap
(CDS) spread is used. This also follows the approach applied by (De Socio, 2011). Figure 15
below illustrates how the 6 month EURIBOR-EONIA spread (market liquidity risk) has
developed from mid 2009 until end 2013. It is clear that this spread peaks around the same
time as the 6 month CDS spreads for Danske Bank and Nordea, indicating that these risk
indicators are correlated.

75

See appendix 8.30 for an historical overview of EURIBOR, EONIA and the spread between these two

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Figure 15: Left: Shows the general market liquidity risk that is measured as the EURIBOR-EONIA spread (%). Right: Shows
the CDS spread (premium) for Danske Bank and Nordea. This spread is used as a proxy for the credit risk associated with
these two financial institutions

Unfortunately, there are two drawbacks with applying the CDS spreads as a measure for
credit risk in this analysis. Firstly, CDS contracts are usually only traded on large corporations,
which means that Danske Bank and Nordea are the only financial institutions in the sample
that hold this data. Secondly, CDS contracts are one of the newer derivatives on the market,
and therefore CDS spreads are only found for Danske Bank and Nordea going back to June
2009. Despite these drawbacks the observed CDS spreads are used to estimate the CDS spread
of the other financial institutions in an attempt to incorporate the credit risk of the individual
financial institution. From Figure 15 it is clear that over the period considered the CDS spread
of Nordea has been more stable and therefore it seems more reasonable to use this spread as
a benchmark than the CDS spread of Danske Bank. In order to measure the credit risk of a
given financial institution in relationship to Nordea a couple of factors need to be accounted
for. Firstly, the relative debt level of the financial institution compared to Nordea needs to be
adjusted for. This is done by taking into account the relative deviation between the debt-toequity ratio of the financial institution and Nordea. Secondly, it is natural that larger financial
institutions have easier access to credit since they have more collateral as well as being more
likely to receive a potential bailout from the government should it be necessary. In order to
capture this size factor, the total assets of the financial institution are compared against the
total assets of Nordea. Since Nordea, together with Danske Bank, is considerably larger than
all other financial institutions, the relative size difference is found after applying the natural

Page 72 of 128

logarithm76. Taking these factors into account the CDS spread of the other financial
institutions are estimated by applying the following formula:

6-6

Once the CDS spread has been found this measure is combined with the EURIBOR-EONIA
spread such that the overall funding risk (FR) for the financial institution can be computed:

6-7

The purpose with the funding risk is to estimate how easy the financial institution can access
outside funding. Naturally, there are different funding sources that the financial institution
can apply, but to keep this estimation in its simplest form, assume that the financial
institution receives outside funding by issuing new shares on the equity market. Assume that
the market value that the financial institution can receive from issuing new shares
corresponds to a fraction, , of its current market value of equity. Building on the model
presented in equation 6-5, the capability of the financial institution to access outside founding
can be modeled in the following way:

6-8

Note that an increase in the funding risk has a negative effect on the working capital 77. This
way the desired relationship between the capability of the financial institution to access

76 Using

the natural logarithm ensures that the relative size difference does not become enormous, such that the
add on size factor is kept at a reasonable level

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outside funding and its financial robustness is captured under the current setup. Following
the steps in section 2.3 and 2.4, the SRISK measure can be computed under this new setup and
is given as78:

6-9

In order to put some numbers to model and test if there is any significant effect observed
from the change in the model,

is set to 8 percent. This fraction corresponds well to the

fraction of market value of equity that Danske Bank managed to raise when the bank issued
shares in 2006 and in 201279. As expected, Figure 16 demonstrates that SRISK does decrease
across all years when the extended model is applied (appendix 8.33 shows SRISK for all
financial institutions under the extended model). The upper-left hand graph shows that the
percentage decrease in SRISK is largest before the crisis begins and then starts to decrease
until it hits a steady level of 3-4 percent. The main reason that the percentage decrease is
large before the crisis begins is that the absolute amount of SRISK is comparatively low and
therefore a given change will have a relatively large effect. Considering the level of systemic
risk that is estimated to be in the financial sector in Denmark, a 3-4 percent decrease in the
overall level would correspond to a decrease of roughly 15-20 billion DKK in absolute terms.

77
78

Appendix 8.31 shows how this expression is derived

On the 15th of November 2006 Danske Bank issued 60.5 million shares which raised the capital of the bank
with 14.67 billion DKK. Given that the market value of equity of Danske Bank was 173 billion DKK, as of end of
2006, this equity issuance corresponded to 8.49% of the market value of equity. In October 2011 the equity
issuance of Danske Bank raised the capital of the bank with 7.15 billion DKK. This increase in capital
corresponded to 7.43% of the market value equity (the market value of equity was 96 billion DKK (end of 2006))
79

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Figure 16: Upper-left: Shows the percentage difference in SRISK when comparing the extended model with the old model.
Lower-left: Shows the total SRISK for the old model and the new model. The parameter is chosen to be 2.5% in both graphs.
Upper-right: Shows the percentage difference in SRISK when comparing the extended model with the old model. SRISK 2.5%
is taken from the upper-left hand graph and is included for comparative reasons. Lower-right: Shows the total SRISK for the
old model and the new model. The parameter is chosen to be 5% in both graphs. The old model is referred to the model
presented in section 2.4. Appendix 8.33 shows SRISK for all financial institutions under the extended model

Let us assume that regulators wish to lower the systemic risk even more and are discussing
the possibility of increasing the fraction on the countercyclical capital buffer, . The graphs on
the right hand side of Figure 16 illustrates that the systemic risk does in fact decrease even
more when the fraction increases. The upper-right hand graph shows that changing to 5
percent decreases SRISK around 5-6 percent when considering the years after 2008. This
shows that keeping all other variables fixed a 2.5 percent-point increase in

lowers SRISK

with almost the same relative amount, i.e., there exists almost a one-to-one relationship
between the percentage-point change in and the relative change in SRISK. In absolute term
this change in amounts to a decrease of total SRISK in the range of 26-30 billion DKK when
comparing it to the old model presented in section 2. Considering that a countercyclical
capital buffer can relatively easy be implemented by regulators, the findings in this subsection
support the recommendation presented in Basel III (Georg, 2011). Following a more
analytical approach, appendix 8.32 also shows that it might be worthwhile investigating a
more heterogeneous approach, where a larger fraction of market value of equity, , is
required from the more interconnected financial institutions. Given that size and

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interconnectedness often are related, this could be implemented in its simplest form by
inducing a larger

for the larger financial institutions and a lower for the smaller financial

institutions. Implementing a non-uniform capital requirement follows the recommendations

that the Committee on Systemically Important Financial Institutions in Denmark present in
their report (Mller, et al., 2013):
Designation as a SIFI implies that additional requirements are set for the institution (Mller,
et al., 2013)
This subsection has demonstrated how the model presented by (Acharya, et al., 2010) and
(Brownless & Engle, 2012) can be extended in order to incorporate the effect of capital
savings and the possibility of accessing outside funding. Using a simple setup this extension
demonstrates that the qualitative effect on systemic risk is that it will decrease after taking
these factors into account. The estimated effect from this change in the model is a decrease in
total systemic risk of 3-6 percent depending on which value of is chosen.
It should be emphasized that the extensions of the model in this subsection are put into
practice by applying a very simplified approach. For instance, given the lack of data
availability the credit risk of the financial institution is estimated using an ad hoc approach,
where it is assumed that the credit risk of the financial institutions is related to the credit risk
of Nordea. This needs of course not be the case. It is clear that, in order to fully grasp the effect
that have been discussed in this subsection the presented model needs to be revised and
tested using a more comprehensive data set. Still the setup of the model and the underlying
reasoning behind it should provide a good starting point when further investigating how
relevant factors can be implemented in the model.
This section has demonstrated how the model presented in section 2 can be used to monitor
the debt-to-equity level of the financial institution. By allowing a systemic risk level of 8
percent of market value of equity, the analysis illustrated that most of the financial
institutions were highly overleveraged during the 2007-2009 financial crisis. Today, the
situation looks much less sever considering that the median financial institution lies slightly
above the permitted level of systemic risk. However, the analysis showed that financial
Page 76 of 128

institutions such as Vestjysk Bank need to lower their debt-to-equity ratio by approximately
one-fifth of the current level in order to reach the maximum level of systemic risk allowed.
This illustrates that in order to reduce the systemic risk regulators need to impose a much
stricter requirement on the leverage ratio of the financial institutions. This follows the
recommendation that is presented by Basel III (Georg, 2011), (Mller, et al., 2013) and
(Kapoor, 2010). Furthermore, under a set of assumptions the second analysis showed that a
stricter capital requirement has a larger effect when imposed on large interconnected
financial institutions. It was found that increasing the minimum capital level, k, only for the
financial institutions in asset group 1 had almost the same overall effect as increasing the
minimum capital level for all financial institutions. This is in line with the findings of (Cont, et
al., 2012) which also conclude that targeting the systematically important financial
institutions is more efficient than increasing the minimum capital level uniformly across all
financial institutions. Finally, the extension of the model demonstrated that applying a
countercyclical capital buffer can help reduce the systemic risk level of the system. This
finding supports the suggestion of applying a countercyclical capital buffer that has previously
been proposed by (Kapoor, 2010), (Bank, 2013) and (Mller, et al., 2013).

Page 77 of 128

7 Conclusion
This thesis fills out the gap necessary to apply the model presented by (Acharya, et al., 2010)
and (Brownless & Engle, 2012) to measure systemic risk in the financial sector in Denmark.
The Danish sample is characterized by holding illiquid stocks, which implies that certain
adjustments are needed in order to measure systemic risk accurately under the current
framework. By applying the 2007-2009 financial crisis as a case study, the best model found
to estimate the MES is the EWMA model using three years of weekly data. After adjusting the
model the systemic risk is measured in the financial sector in Denmark during the time period
2006-2013. In the aftermath of the 2007-2009 financial crisis the overall systemic risk is
found to peak in 2011 reaching an estimated level of 624 billion DKK. At the time this
corresponded to approximately one-third of Denmarks annual GDP. Today, the overall
systemic risk is estimated to be 413 billion DKK, approximately one-fifth of the annual GDP.
Even though the trend is pointing in the right direction, the overall systemic risk is still found
to be approximately twice as large as it was before the crisis.
During the time period considered, the systemic risk is measured for 60 financial institutions
in Denmark. The main drivers behind the systemic risk level in Denmark are Danske Bank and
Nordea that together possess 89-99% of the overall systemic risk depending on which year is
considered. By applying observed data on capital injection and extracting systemic risk
measures (SRISK) from V-Labs website, the validity of the systemic risk measure in this thesis
is challenged. The test shows that the systemic risk measure presented in this thesis
corresponds well with the measures found on V-Labs website, but is found to underestimate
the capital injection that is needed for a financial institution to overcome a sever crisis such as
the 2007-2009 financial crisis. On the other hand, the measure is believed to provide a good
starting point when estimating the capital needed to overcome a more normal crisis.
As an extension to the current tools presented by (Acharya, et al., 2010) and (Brownless &
Engle, 2012), the risk measures RSRISK and RSRISK% are derived by controlling for the
relative size of the financial institution. These risk tools were proven to provide good insights
on the general robustness of the financial institution by being able to identify smaller financial
institutions that are showing signs of financially distress. For instance, after excluding the
Page 78 of 128

financial institutions in asset group 1, the financial institutions that have the largest annual
measure of RSRISK% over the period 2006-2012 have all defaulted, indicating that there
exists a relationship between RSRISK% and the financial robustness of the financial
institution.
In an attempt to make the model better reflect the potential sources of capital that are
available for the financial institutions, the model is extended such that it takes into account
the possibility of capital savings and outside funding. By investigating how the model can be
implemented by regulators, examples are provided on how it can be used to monitor and
mitigate systemic risk. The main findings on how to reduce systemic risk can be summarized
as follows:

The leverage ratio of the financial institutions needs in general to be lowered

through stricter capital requirement

The capital requirements should be imposed by applying a non-uniform approach

where larger and more interconnected financial institutions are given stricter capital
requirements

A countercyclical capital buffer should be imposed that forces financial institutions

to put aside capital in good times to help withstand the financial pressure during bad
times. The size of the countercyclical capital buffer should be further increased for
larger and more interconnected financial institutions

The work presented in this thesis can be extended in several directions. Firstly, the extension
of the model only considers outside funding through the equity market. Financial institutions
usually have access to capital through several other sources such as the interbank market or
the option of issuing corporate bonds. An alternative approach would be to include these
factors and measure how it changes the outcome. Secondly, the interconnectedness of the
financial institutions could be measured using other security prices than the stock price. As an
example, the price of the equity options could be used instead. However, this depends on how
easily this data can be provided since option prices usually are harder to get than stock prices.
Page 79 of 128

Lastly, the debt structure of the financial institutions could be investigated more closely, since
it often is the level of short-term debt that is crucial when determining the robustness of the
financial institutions. The approach in this thesis does not distinguish between long-term and
short-term debt and therefore it fails to capture the effect that the debt structure might have
on the robustness of the financial institutions.

Page 80 of 128

8 Appendix
8.1 Interconnectedness of the global market the contagion effect
Figure 17 shows the weekly change of five stock market indices during the period June 2006
until December 2010 (the stock market indices have been indexed to June 2006, i.e., June
2006 = 100). These five stock market indices are; Nikkei (Tokyo stock exchange), FTSE 100
(London stock exchange), KAX (Copenhagen stock exchange), S&P 500 (New York stock
exchange) and DAX (Frankfurt stock index)80. Each of the stock market indices have been
chosen to represent their specific region, and by looking at their development during this
turbulent period it is possible to get an indication of how interconnected these regions were
before, during, and after the financial crisis.
There is much debate about when exactly the financial crisis exactly began and when it ended
(or even if it has ended yet). Inspired by the time period chosen by (Acharya, et al., 2010), the
crisis period is chosen to be from July 2007 to December 2008. The pre- and post crisis
periods are chosen be from June 2006 until June 2007 and January 2009 till December 2010,
respectively. These periods are separated by dotted lines and labeled textboxes in Figure 17
to give a better illustration on how the co-movement is between these time series across the
different periods.

80

The time series have been extracted from yahoo.finance.com

Page 81 of 128

Figure 17: Nikkei, FTSE 100, OMX C20, S&P 500 and DAX weekly time series from June 2006 until December 2010. The time
series have been indexed to June 2006, i.e. June 2006 = 100

As expected, Figure 17 shows that the financial markets are very connected across regions.
The time series clearly shows that the downturn and upturn of these markets follow the same
pattern, and that this strong relationship holds for all three time periods that are considered.
To analyze this relationship even closer, Table 8 shows the correlation between these time
series pre-, during- and post-crisis. The first thing worth noticing is that the correlation
between the market indices is fairly high across all three time periods. The lowest correlation
factor is 0.57, while the largest is 0.9981. The second interesting finding is that the correlation
between the indices is largest during the crisis period. The fact that the correlation across
markets grows even stronger during recession is a well-known panic phenomenon that
many researchers have investigated closely (see for instance (Solnik, et al., 1996),
(Morgenstern, 1959) or (Sandoval & Franca, 2012)). Finally, the correlation matrices also tell
us that the correlations between the indices were, generally, stronger pre-crisis than postcrisis.

81

Nikkei and OMX C20 have a correlation factor of 0.55 post-crisis. FTSE 100 and S&P 500, FTSE 100 and DAX
have a correlation factor of 0.99 during the crisis. Also FTSE 100 and S&P 500 have a correlation factor of 0.99
post-crisis

Page 82 of 128

Table 8: Correlation matrices for the five market indices during the periods before, during and after the financial crisis

The findings from Figure 17 and Table 8 illustrate how interconnected financial markets are,
and how quickly the collapse of one market can spread onward to the other markets in the
system.

8.2 Coherent risk measures

This appendix presents the properties that are considered when evaluating if a risk measure
is coherent. The material presented in this appendix builds on (Artzner, et al., 1999) and (Hull,
2010).
In order to determine which risk measure is the most appropriate, (Artzner, et al., 1999)
propose the following properties that should be fulfilled for a risk measure:
1. Monotonicity: If a portfolio produces a worse result than another portfolio for every
state of the world, its risk measure should be greater.
2. Translation invariance: If an amount of cash C is added to a portfolio, its risk measure
should go down by C.
3. Homogeneity: Changing the size of a portfolio by a factor , while keeping the relative
amounts of different items in the portfolio the same, should result in the risk measure
being multiplied by .
4. Subadditivity: The risk measure for two portfolios after they have been merged should
be no greater than the sum of their risk measures before they were merged.
The risk measure expected shortfall (ES) satisfies all four conditions. On the other hand, VaR
satisfies the first three properties, but does not always satisfy the fourth one. To illustrate this,
when this condition is not satisfied, consider the following example:

Page 83 of 128

Example 8.2
Suppose each of two independent projects has a probability of 0.01 of a loss of $10 million
and a probability of 0.99 of a loss of $1 million during a one-year period. The one-year, 99%
VaR for each project is $1 million, which means that the total VaRs of the projects considered
separately is $2 million. What happens to the VaR level if the projects are put in the same
portfolio? When the projects are put in the same portfolio there is a 0.001 (

probability of a loss of $20 million, a 0.0198 (2 * 0.01 * 0.99) probability of a loss of $11
million, and a 0.9801 (0.99 * 0.99) probability of a loss of $2 million. Table 9 below
summarizes the probabilities and potential losses. The one-year 99% VaR for the portfolio is
$11 million, which is $9 million larger than the total VaR when the projects are considered
separately. This is an example of a violation of the subadditivity condition.

Portfolio
Loss ($)
20 million
11 million
2 million

Considered separately

Probability
0.01 * 0.01 =
0.0001
2 * 0.01 * 0.99 =
0.0198
0.99 * 0.99 =
0.9801

99 % VaR for portfolio

11 million

Project 1
Loss ($)
Probability
10 million
0.01
1 million
0.99

Project 2
Loss ($)
Probability
10 million
0.01
1 million
0.99

99% VaR
1 million
99% VaR
Total 99% VaR considered separately

1 million
2 million

Table 9: Overview of the calculations in example 8.2

8.3 Converting MES to LRMES

This appendix sets out to explain the relationship between the marginal expected shortfall
(MES) and the long run marginal expected shortfall (LRMES):

8-1

where

is a correction factor, is the length of the crisis period and h is the length of the

historical data used to estimate MES.

Page 84 of 128

The approximation in equation 8-1 is based on data used by (Engle, et al., 2012) and therefore
the underlying assumptions follow the assumptions that they make:

Define a financial crisis as a drop of about 40-50% of the market over a 6-month
period

Following (Gabaix, 2009) assume a power law for the distribution of returns in the
extremes

Assume that returns are independent over time

Historically, the kind of financial crisis defined above has about a 1% probability of
occurrence every semester (or one such financial crisis out of every 50 years). By assuming a
power law, the following can be stated:
=

Where

8-2

and being the tail index of the return distribution. In the data

set that (Engle, et al., 2012) apply the tail index is estimated to be 0.277. Their data set consist
of European financial institutions with a minimum market capitalization of 1 billion (as of
the end of 2011) and a stock price series that starts before 2005. Their sample period is from
1990 until 2011. Given that the sample consists of European financial institutions it seems to
be fair to assume that the market trends in this data set have a close resemblance to the
market trends in the data set used in this thesis. Based on this assumption, the same tail index
is applied in this thesis, i.e.

, and as a result

, when the probability of a crisis

is 1%.
Define the LRMES as minus the cumulative return given that the system goes through a crisis
(let the crisis period be given as the time interval

). Then, assuming time

independence of returns, the following is obtained:

Page 85 of 128

8-3

Using equation 8-2 this can be stated as:

8-4

When using daily data and a crisis period of six months

and

. Given this

information equation 8-4 can be applied directly to convert MES into LRMES.

8.4 Special case: Nykredit

Since observed stock prices are required to calculate the risk measures that are used in this
thesis, it is essential that the financial institutions in the sample are listed on the stock
exchange. However, Nykredit, which is one of the leading financial institutions in Denmark, is
not listed on the stock exchange. Given the market share that Nykredit has it would truly be a
loss to the analyses in this thesis if it were to be left out of the sample. Therefore, initiatives
have been made, to see if there is a way such that Nykredit can be included even though it is
not listed on a stock exchange.
Although Nykredit is not directly listed on the stock exchange it has an open-end investment
fund that is listed on the Copenhagen Stock Exchange. This fund is called Nykredit Invest
Danske Aktier and is engaged in making investments primarily in Danish stocks listed on the
Copenhagen Stock Exchange. Since this fund is divided from the overall concern and operates
as a separate entity it is not clear that there should a link between its performance and the
overall performance of Nykredit. However, as a best proxy it is worth testing if there is a
reasonable relationship between these two performances, which then can be utilized in order
to include Nykredit in the sample. The hypothesis is at least that investors associate Nykredit
Invest Danske Aktier with Nykredit, and therefore they would to some degree attach the same

Page 86 of 128

risk profile to these two investments. To test this hypothesis, the stock prices of investment
funds of other financial institutions have been compared directly against the stock price of the
financial institution. If it is clear that the stock price of the investment fund does follow the
stock price of the financial institution then there is reason to believe that this relationship also
holds for Nykredit. Therefore, if this relationship is found to hold for other financial
institutions, this supports the fact that the stock price of Nykredit Invest Danske Aktier can be
used as a proxy for the stock price of Nykredit.
Luckily, financial institutions that are similar to Nykredit, and are listed on the Copenhagen
Stock Exchange, do in fact have an investment fund that also is listed on the stock exchange.
The most comparable financial institutions in this category are Jyske Bank and Nordea, where
Jyske Bank, based on size, probably is the more comparable of these two. The figure on the left
hand side of Figure 18 shows the stock price of Nordeas investment fund, Nordea Investment
Danske Aktier, the stock price of Nordea and the KAX Index. These stock prices have all been
indexed to 27th of February 2007 when Nordea Investment Danske Aktier went public. The
graph on the right hand of Figure 18 shows the stock price of Jyske Banks investment fund,
Jyske Invest Danske Aktier, the stock price of Jyske Bank and the KAX index. These stock
prices have been indexed to 2nd of January 2006. What we are trying to investigate with these
two plots is, if the stock price the investment fund (blue line) could work as a proxy for the
stock price of the financial institution (red line). The KAX index has been included as a
benchmark in both plots to investigation if the link between the stock price of the investment
fund and the financial institution is stronger than the link between the investment fund and
the market index. If the latter link is found to be stronger one could argue that the market
index should be used as proxy for Nykredit instead of the stock price of the investment fund.

Page 87 of 128

Figure 18: Left: Stock price of Nordeas investment fund, Nordea Invest Danske Aktier, (blue) compared against Nordea stock
price (red) and the KAX index (green). The stock prices have been indexed to 27 February 2007, which is the day the
investment fund went public. Right: Stock price of Jyske Banks investment fund, Jyske Invest Danske Aktier, (blue) compared
against Jyske Banks stock price (red) and the KAX index (green). The stock prices have been indexed to 2 January 2006

Figure 18 clearly shows that the stock price of the investment fund, the financial institution
and the KAX index follow each other. This relationship holds both for Nordea and Jyske Bank.
Based on these plots it seems reasonable that the stock price of the investment fund can be
used as a proxy for the stock price of the financial institution.
Table 10 below shows the correlation matrices for Nordea and Jyske Bank, respectively. Also
this table shows that there is a strong correlation between the stock price of the investment
fund, the stock price of the financial institution and the KAX index. In Nordeas case it seems
as if the KAX index actually would be a better proxy for the stock price than the investment
fund Nordea Invest Danske Aktier. However, in Jyske Banks case the opposite holds, as there
is found to be a stronger correlation (0.96) between the investment fund and financial
institution compared with the correlation between the investment fund and the KAX index
(0.85).

Nordea Invest Danske Aktier

Nordea
KAX

Jyske Invest Danske Aktier

Jyske Bank
KAX

Nordea Invest Danske Aktier

Nordea

KAX

1
0.86
0.94

1
0.91

Jyske Invest Danske Aktier

Jyske Bank

KAX

1
0.96
0.85

1
0.71

Table 10: Correlation matrices for Nordea and Jyske Bank

Page 88 of 128

From the plots in Figure 18 and the correlations matrices in Table 10 it looks like the stock
price of the investment fund works well as a proxy for the stock price of the financial
institution. Especially, in the case of Jyske Bank, the stock price of their investment fund, Jyske
Invest Danske Aktier, seems to be a very good stand-in for the stock price of Jyske Bank. Since
Jyske Bank and Nykredit are very comparable in size it seems more reasonable to compare
Nykredit with Jyske Bank than Nordea82. Therefore, based on the strong relationship that is
found between the stock price of the investment fund of Jyske Bank and the stock price of
Jyske Bank, the stock price of Nykredit Invest Danske Aktier has been used as a proxy for the
stock price of Nykredit in this thesis.
When calculating the leverage ratio, LVG, the market capitalization for the financial institution
is needed. This is usually found by multiplying the stock price with the total number of shares
outstanding. Since Nykredit is not listed on the stock exchange it is not possible to find out
how many shares Nykredit has outstanding (the stock price is assumed to follow the stock
price of the investment fund, Nykredit Invest Danske Aktier). To find a proxy for outstanding
shares it is assumed that the total assets ratio between Jyske Bank and Nykredit is the same as
the ratio between their outstanding shares. Denote outstanding shares OS and total assets
TA then this assumption can be stated as:

8-5

8.5 Pre-crisis: Financial institutions included in the analysis

The requirement needed for a financial institution to be included in the pre-crisis analysis is
that it was listed before our pre-crisis period begins, i.e. no later than June 2006. Furthermore,
financial data such as total assets and total equity need to be available such that the leverage
measure, LVG, can be calculated. After accounting for these requirements 102 financial
institutions are included in the data sample.
82

The total assets of Jyske Bank in Q2-2007 were 180 billion DKK, whereas Nykredits were 130 billion DKK.
The total assets of Nordea were 2,791 billion DKK in Q2-2007

Page 89 of 128

Table 11: Complete list of all financial institutions included in the sample
Financial institution
Danske Bank
Nordea
Jyske Bank
Nykredit
Sydbank
Spar Nord
Roskilde Bank
Vestjysk Bank
Ringkjbing Bank
Alm. Brand
Ln og Spar Bank
Nrresundby Bank
Ringkjbing Landbobank
Nordjyske Bank
stjydsk Bank
Djurslands Bank
Sparekassen Faaborg
DiBa Bank
Amargerbanken
Grnlandsbanken
Svendborg Sparekasse
Salling Bank
Totalbanken
Kreditbanken
Vestfyns Bank
Lolland Bank
Mns Bank
Vordingborg Bank
Hvidbjerg Bank
Alm. Brand Formue
Fynske Bank
Jeudan
Jutlander Bank
Luxor-B
Nwecap Holding
Nordfyns Bank
Realia
Smallcap Danmark
Skjern Bank
TK Development
Topdanmark
Tryg
Aarhus Lokalbank
Bonusbanken
EBH Bank
Fionia Bank
Forstdernes Bank
Lokalbanken i Nordsjlland
Max Bank
Sklskr Bank
Sparbank
Tnder Bank
Vinderup Bank
Olav Thon Eiendomsselskap
Sparebanken st
Sparebanken Mre
DNB ASA
SpareBank 1 NordNorge
SpareBank 1 SMN
SpareBank 1 BV
Sparebanken Vest
Sandnes Sparebank
Totens Sparebank
SpareBank 1 Ringerike
Indre
Sogn Sparebank
Hadeland
Sparebanken Sr
Aurskog Sparebank

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G3
G2
G3
G3
G2
G3
G3
G3
G3
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G2
G3
G3
G3
G2
G2
G3
G3
G3
G2
G3
G3
G2
G2
G2
G1
G2
G1
G3
G1
G2
G3
G3
G3
G2
G3

Type
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Real E
Bank
Invest F
Invest F
Bank
Real E
Invest F
Bank
Real E
Insuran
Insuran
ce
Bank
ce
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Real E
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank
Bank

Country
MES
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
NO
NO
NO
DK
NO
NO
NO
NO
NO
NO
NO
NO
NO
NO

Country
SRISK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
DK
NO
NO
NO
NO
NO
NO
NO
NO
NO
NO
NO
NO
NO
NO

RSES
-77%
-56%
-69%
-59%
-76%
-68%
-100%
-86%
-88%
-80%
-28%
-64%
-70%
-64%
-68%
-60%
-77%
-89%
-94%
-70%
-45%
-58%
-83%
-46%
-57%
-67%
-66%
-53%
-67%
-63%
-45%
-24%
-45%
-83%
-89%
-73%
-54%
-51%
-84%
-85%
-27%
-24%
-77%
-99%
-100%
-88%
-55%
-34%
-89%
-67%
-84%
-39%
-55%
-37%
-64%
-34%
-64%
-69%
-57%
-51%
-55%
-77%
-63%
-19%
-41%
-44%
-43%

RSESmax
-79%
-59%
-73%
-62%
-79%
-71%
-100%
-88%
-89%
-82%
-29%
-71%
-74%
-71%
-75%
-62%
-80%
-90%
-95%
-78%
-52%
-58%
-84%
-51%
-59%
-74%
-68%
-54%
-75%
-71%
-52%
-28%
-60%
-84%
-91%
-77%
-69%
-55%
-86%
-87%
-45%
-35%
-79%
-99%
-100%
-92%
-75%
-71%
-90%
-73%
-86%
-44%
-55%
-47%
-66%
-47%
-75%
-73%
-68%
-57%
-58%
-78%
-66%
-25%
-46%
-46%
-43%

MES
1.89%
2.28%
2.38%
1.76%
2.19%
2.14%
0.11%
0.79%
1.19%
2.30%
0.08%
0.33%
1.27%
1.65%
-0.03%
0.17%
0.60%
-0.84%
2.53%
0.39%
0.31%
0.16%
0.32%
-0.31%
0.06%
1.77%
0.51%
0.33%
1.25%
0.70%
0.31%
2.29%
-0.18%
0.69%
2.24%
0.80%
1.41%
3.18%
0.40%
3.18%
2.11%
2.04%
0.32%
1.55%
-0.36%
1.44%
1.34%
0.70%
1.07%
-0.43%
0.59%
1.36%
0.09%
1.02%
0.25%
0.61%
2.30%
1.22%
0.09%
0.01%
0.96%
0.41%
-0.42%
0.12%
-0.71%
0.15%
0.16%

LVG
19.83
12.92
7.88
10.57
7.22
8.05
5.98
6.18
6.46
6.42
6.94
5.63
3.96
4.48
6.17
5.93
2.79
4.89
7.59
2.56
3.55
5.36
2.39
3.47
5.07
3.75
3.93
4.35
5.04
3.10
3.26
2.24
3.22
2.07
1.45
5.17
1.39
1.09
5.53
1.79
3.36
2.16
6.58
2.05
2.56
10.45
7.90
4.73
6.42
4.70
6.35
5.38
3.22
2.76
35.73
24.45
14.44
24.15
17.77
47.65
136.56
29.89
26.25
68.14
32.74
73.75
29.65

ES
2.65%
2.77%
3.25%
2.90%
2.60%
3.29%
1.87%
2.19%
2.27%
3.24%
1.43%
1.84%
2.44%
3.25%
1.75%
1.77%
2.34%
2.81%
4.26%
3.28%
4.40%
2.64%
4.81%
4.54%
3.09%
6.98%
5.99%
2.02%
8.22%
2.80%
4.40%
4.11%
2.60%
3.78%
4.74%
4.77%
9.08%
4.07%
2.25%
5.29%
2.93%
3.36%
2.21%
3.96%
3.31%
3.41%
2.45%
2.58%
3.15%
3.54%
3.53%
5.46%
4.18%
3.64%
3.65%
3.01%
3.33%
3.34%
2.67%
4.07%
4.06%
3.28%
4.97%
8.71%
6.62%
6.32%
3.92%

Vol
18.78%
21.34%
22.18%
19.47%
20.05%
26.44%
13.53%
16.47%
18.30%
22.21%
14.72%
13.46%
18.63%
24.72%
11.88%
10.73%
23.04%
21.65%
28.46%
25.04%
27.65%
18.25%
31.68%
21.39%
19.09%
46.27%
36.57%
22.45%
44.26%
19.03%
27.65%
25.95%
14.34%
21.13%
35.50%
27.60%
61.14%
25.74%
17.67%
43.59%
22.97%
23.84%
18.33%
31.66%
26.94%
24.16%
19.24%
18.96%
21.77%
27.11%
25.05%
33.74%
19.73%
25.18%
23.44%
20.01%
23.43%
26.02%
20.54%
16.29%
21.46%
19.96%
28.71%
19.90%
26.51%
22.21%
10.51%

Beta
0.95
1.04
1.09
0.80
0.99
0.91
0.16
0.41
0.28
1.04
0.13
0.09
0.40
0.62
0.11
0.11
0.23
-0.09
1.06
0.38
0.17
0.19
-0.01
0.14
0.20
0.71
0.20
0.14
0.57
0.41
0.17
0.73
-0.15
0.43
0.79
0.62
0.83
1.00
0.11
1.72
1.11
1.01
0.17
0.43
0.04
0.70
0.49
0.33
0.22
0.18
0.45
0.42
0.23
0.26
0.08
0.11
0.72
0.32
0.26
0.04
0.15
0.10
-0.07
0.05
-0.49
0.32
0.10

Page 90 of 128

Skue Sparebank
Hland og Setskog
Helgeland
SparebankSparebank
SpareBank 1 stfold
Norwegian
Akershus Property
Klepp Sparebank
SpareBank 1 SR-Bank
Avanza Bank Holding AB
Atrium Ljungberg AB ser. B
Castellum AB
Fabege AB
Hufvudstaden AB ser. A
Investor AB ser. A
Kinnevik, Investment AB ser.
Latour,
Investmentab. ser. B
A
Lundbergfretagen AB, L E
Melker
ser. B Schrling AB
Svenska Handelsbanken ser.
Wallenstam
AB ser. B
A
Bure Equity AB
Catena AB
Dis Fastigheter AB
Fastighets AB Balder ser. B
Heba Fastighets AB ser. B
Klvern AB
Kungsleden AB
SEB
Sagax AB ser. A
Swedbank AB ser A
Wihlborgs Fastigheter AB
resund, Investment AB

G3
G3
G2
G3
G2
G3
G1
G3
G2
G2
G2
G2
G1
G2
G2
G1
G2
G1
G2
G3
G3
G3
G3
G3
G3
G2
G1
G3
G1
G3
G3

Bank
Bank
Bank
Bank
Real
Bank
Estate
Bank
Bank
Real E
Real E
Real E
Real E
Invest F
Invest F
Invest F
Invest F
Invest F
Bank
Real E
Invest
Real
mentE
Real
FundE
Real E
Real E
Real E
Real E
Bank
Real E
Bank
Real E
Invest F

NO
NO
NO
NO
NO
NO
NO
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
DK
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
DK
SWE
SWE
SWE
SWE

NO
NO
NO
NO
NO
NO
NO
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE
SWE

-44%
-28%
-44%
-37%
-92%
-32%
-47%
-44%
-35%
-27%
-60%
-28%
-35%
-55%
-48%
-38%
-63%
-35%
-56%
-19%
-44%
-52%
-60%
-28%
-33%
-34%
-73%
-59%
-82%
-17%
-63%

-44%
-33%
-49%
-45%
-92%
-34%
-62%
-52%
-64%
-50%
-77%
-45%
-50%
-68%
-60%
-61%
-64%
-44%
-66%
-34%
-51%
-56%
-71%
-37%
-62%
-70%
-79%
-65%
-84%
-54%
-65%

0.13%
0.27%
0.00%
-0.25%
0.71%
0.18%
0.54%
2.67%
0.21%
3.03%
3.01%
2.53%
2.91%
1.85%
0.82%
2.12%
0.70%
2.86%
2.50%
1.41%
0.86%
1.79%
1.54%
1.00%
2.40%
2.90%
3.34%
2.11%
3.05%
3.09%
1.60%

22.30
33.13
34.74
44.79
2.79
33.84
21.25
3.88
1.85
1.89
2.09
1.47
1.17
1.37
1.23
2.02
1.01
14.66
2.21
1.40
2.22
2.59
4.19
1.33
2.35
1.91
14.90
3.35
12.17
2.28
1.11

4.79%
11.12%
3.67%
3.10%
2.63%
2.94%
2.93%
4.35%
2.75%
5.09%
4.53%
4.35%
3.43%
4.71%
2.43%
3.06%
2.62%
3.48%
3.54%
2.36%
2.17%
3.42%
4.70%
4.73%
4.67%
5.15%
3.58%
4.07%
3.66%
5.00%
2.91%

15.61%
22.52%
21.24%
15.96%
24.60%
18.87%
20.61%
33.35%
26.25%
35.34%
30.52%
33.20%
25.85%
33.70%
18.46%
22.77%
18.66%
22.73%
25.99%
18.94%
16.12%
26.06%
32.51%
32.66%
32.75%
35.92%
27.72%
37.68%
26.95%
40.37%
25.05%

0.23
1.04
0.05
0.01
0.36
0.21
0.28
1.12
0.02
1.02
0.96
0.79
1.23
0.84
0.36
0.75
0.60
1.00
0.74
0.40
0.30
0.48
0.45
0.15
0.76
1.07
1.30
0.80
1.10
0.96
-0.09

Table 11: Shows a complete list of all the financial institutions that are considered in the MES analysis (section 4). The
computation is based on pre-crisis data, i.e., from beginning of June 2006 until the end of June 2007. The column Country
MES shows how the financial institutions have been allocated for the MES analysis (section 4), while the column Country
SRISK shows how the financial institutions have been allocated for the systemic risk analysis (section 5 and 6). The only
difference between these columns is that SEB, Svenska Handelsbanken and DNB Bank ASA are included in the Danish sample
for the MES analysis, but not for the SRISK analysis

Page 91 of 128

8.6 Proof of RSESmax formula

The appendix shows how to get from equation 8-6 to equation 8-7:

8-6

8-7

The conditions that are required are:

1) Date 1 occurs before Date 2 such that the minimum return can be found given a
chronological time order
2) The stock prices that are found are taken from the same time period, i.e.

for

all stock prices

Firstly, partial differentiate equation 8-6 with respect to

8-8

Secondly, partial differentiate equation 8-6 with respect to

8-9

From equation 8-8 we see that increasing

would increase

. Since the optimization problem is to minimize

therefore need to find the minimum value of
minimize

with respect to

, we
given

to

Page 92 of 128

From equation 8-9 we see that increasing

would decrease

. Since the optimization problem is to minimize

therefore need to find the maximum value of
minimize

with respect to

, we
given

to

Based on these arguments it is possible to get from equation 8-6 to equation 8-7.
Given condition 1) there are some special cases were equation 8-7 cannot be applied directly,
but where it is necessary to break down the time periods to smaller periods to make sure that
the minimum return is found based on stock prices that are given in a chronological order.
These special cases only occur if the stock price fluctuates a lot over the chosen time period.
The graph on the left hand side of Figure 19 gives an example of this special case. For the
analyses in this thesis, however, this special case does not occur for the duration of the crisis
period considered. The return of all stock prices in the data sample are decreasing over the
crisis period, and therefore the shape of the graph on the right hand side of Figure 19 holds
for all stocks. This shape illustrates that the max price and min price are always found in a
chronological order and as a result of that condition 1) is valid and equation 8-7 can be
applied directly to find the minimum return of the stock.

Figure 19: Left: The max and min stock prices are not given in a chronological order when searching for the minimum return;
condition 1) is not valid. Right: The minimum return is found between max and min stock price. Since max and min are given
in a chronological order, therefore condition 1) is valid in this case. All stock prices in the sample are decreasing over the
crisis period, thus the shape of this graph holds for all stocks and condition 1) is therefore valid when applying equation 8-7

Page 93 of 128

8.7 Leverage ratio - LVG

Due to limited and infrequent market data, especially on the breakdown of off- and onbalance sheet financing, it can be a challenge to measure true leverage. This thesis applies the
same method as (Acharya, et al., 2010) use to measure leverage, LVG. LVG is found by dividing
the quasi-market value of assets with market capitalization:

8-10

From 8-10 it is clear that LVG increases in booked debt and decreases in booked equity. Since
market capitalization is both in the numerator and denominator it is not crystal clear how a
change in this variable affects LVG. By differentiating 8-10 with respect to market
capitalization we end up with the following expression83:

8-11

Since book debt is always non-negative and market cap always positive, the expression in 8-11
will always be non-positive. This means, for instance, that an increase in the stock price of
financial institution i will, through an increase in market capitalization, decrease the leverage
ratio LVG84.
Table 12 below presents LVG for eight selected financial institutions (banks) in the sample.
The booked assets and booked equity used to calculate the LVG ratio is taken from Q2-2007.
Given that financial data is only released on a quarterly basis this is the closest we get to
measure the leverage condition of the financial institutions just before the crisis begins. If,
however, financial data from Q2-2007 has not been available, financial data from Q4-2006 has
83

84

The only exception would of course be if the financial institution did not have any debt. Then a change in
market capitalization would not have any effect on LVG

Page 94 of 128

been used. The LVG ratios from Q2-2007 and Q4-2006 are presented in the second and third
columns in Table 12, respectively. The last column consolidates the LVG ratio based on the
data that is available, where the values in black are taken from Q2-2007 and the values in
green are taken from Q4-2006. The financial institutions that are written in bold are financial
institutions that defaulted during the 2007-2009 financial crisis. Interestingly, it does not
seem as though these financial institutions had a significantly larger LVG ratio compared with
the financial institutions that did not default. On the contrary, when only considering this
small subsample, it looks as though the financial institutions that did survive the crisis
actually had a considerably larger LVG ratio compared with the LVG ratio of their defaulting
competitors.

Name
Danske Bank
Nordea
Jyske Bank
Fynske Bank
Bonusbanken
EBH Bank
Fionia Bank
Max Bank

1st: Q2-2007
19.83
12.92
7.88
2.05
2.56
6.42

2nd: Q4-2006
17.50
11.38
7.07
3.26
1.82
2.83
10.45
4.91

LVG
19.83
12.92
7.88
3.26
2.05
2.56
10.45
6.42

Table 12: Leverage ratio, LVG, for eight selected financial institutions (banks). The names that are written in bold format are
financial institutions that defaulted during the 2007-2009 financial crisis. The second column shows LVG from Q2-2007,
while the third column shows LVG from Q4-2006. The period Q2-2007 is the preferred pre-crisis choice for LVG, but if LVG
has not been found for this period, Q4-2006 has been applied. The last column consolidates this preference, where values in
black are LVG from Q2-2007 and values in green are LVG from Q4-2006.

8.8 Summary statistics including financial institutions from Norway and Sweden
Summary statistics
Statistic

RSES

RSESmax

MES

LVG

ES

Vol

Beta

N
Mean
St. Dev.
Min
Median
Max

98
-0.58
0.21
-1.00
-0.57
-0.17

98
-0.65
0.18
-1.00
-0.66
-0.25

98
0.01
0.01
-0.01
0.01
0.03

98
11.40
18.68
1.01
4.81
136.56

98
0.04
0.02
0.01
0.03
0.11

98
0.25
0.08
0.11
0.23
0.61

98
0.48
0.41
-0.49
0.39
1.72

Table 13: Summary statistics including financial institutions from Norway and Sweden

Page 95 of 128

8.9 2007-2009 financial crisis in Denmark

Figure 20: How the stock price of the KAX index, Danske Bank, Nordea, Jyske Bank, Sydbank and Topdanmark A/S has
evolved during the period June 2006 until December 2010. All prices have been index to June 2006, i.e. June 2006 = 100. The
colored box shows the crisis period (red) and when the time series hit their lowest value (orange).

8.10 MES analysis - regression output table

Linear regression output table

Dependent variable:
RSES
MES
Constant
Observations
R2
Adjusted R2
Note:

(1)

(2)

RSESmax
(3)

RSESmax Q4-2009
(4)

1.171
(2.596)
-0.672***
(0.040)

1.331
(1.984)
-0.592***
(0.031)

-1.151
(1.678)
-0.637***
(0.026)

-0.858
(1.601)
-0.675***
(0.025)

56
0.004
-0.015

98
0.005
-0.006

98
0.005
-0.005

98
0.003
-0.007
*

p<0.1; **p<0.05; ***p<0.01

Table 14: Linear regression output table. All financial institutions are included in all regression models, except model 1
which only considers Danish financial institutions

Page 96 of 128

8.11 Average daily volume Nasdaq OMX

The values used in Table 15 and Table 16 are taken from www.nasdaqomx.com.
Table 15: Nasdaq OMX Nordic
Average
Year
2006
2007
2008
2009
2010
2011
2012
2013

# of trades
121,503
186,162
210,232
201,458
270,782
351,027
301,832
291,174

# of traded shares
754,580,547
793,887,049
620,389,109
335,428,258
278,631,880
276,193,009
247,342,710
316,936,722

# listed companies
636
652
613
593
583
574
562
558

# of traded shares per company

1,186,447
1,217,618
1,012,054
565,646
477,928
481,172
440,112
567,987

Table 15: Average number of trades and traded shares on Nasdaq OMX Nordic. Number of listed companies is by end of
period. Number of traded shares per company is calculated as average number of traded shares divided by the number of
listed companies (dividing column 3 with column 4)

Table 16: Nasdaq OMX Copenhagen

Average
Year
2006
2007
2008
2009
2010
2011
2012
2013

# of trades
20,914
31,934
33,127
32,068
40,463
46,561
43,636
53,905

# of traded shares
26,593,066
24,629,318
19,818,710
23,533,244
21,350,811
18,428,046
17,940,085
22,604,775

# listed companies
190
204
200
194
188
180
168
160

# of traded shares per company

139,964
120,732
99,094
121,305
113,568
102,378
106,786
141,280

Table 16: Average number of trades and traded shares on Nasdaq OMX Copenhagen. Number of listed companies is by end of
period. Number of traded shares per company is calculated as average number of traded shares divided by the number of
listed companies (dividing column 3 with column 4)

8.12 Volume group allocation

Table 17 below shows how the financial institutions in the data sample are broken down by
volume group and country. Looking at this table from a Danish point of view we see that
combining group 2, group 3 and group 4 gives 43 financial institutions. Since it is only
financial institutions from group 1 that have an average daily volume that potentially is larger
than that of an average company listed on Nasdaq OMX Copenhagen in 2007, all of these 43
financial institutions (out of a total of 56) had an average daily pre-crisis volume that is less
than the average listed company had in 2007. This shows that many of the financial

Page 97 of 128

institutions in the data sample are not traded very frequently, which implies that market
shocks might not have an instantaneous effect on the stock price of these financial
institutions.
Volume group

Group 1

Group 2

Group 3

Group 4

Not available

Total

13
3
11
27

7
2
9
18

23
11
1
35

13
1
0
14

0
3
1
4

56
20
22
98

Denmark
Norway
Sweden
Total

Table 17: Number of financial institutions by volume group and country

Table 18 below shows the average MES by volume group and country. From this table it is
also clear that MES and volume are directly related.

Volume group

Group 1

Group 2

Group 3

Group 4

2.43%
0.45%
2.63%
2.29%

1.51%
1.12%
1.40%
1.41%

0.61%
0.18%
1.85%
0.51%

0.51%
0.27%

Denmark
Norway
Sweden
Weighted average

0.50%

Not available

Total

-0.14%
0.70%
0.07%

1.12%
0.27%
2.01%
1.15%

Table 18: Average MES by volume group and country. The weighted average is based on how many financial institutions are
within each volume group

8.13 Weekly data analysis

Summary statistics
Statistic
N
Mean
St. Dev.
Min
Median
Max

MES Daily MES 6yr MES 5yr MES 4yr MES 3yr
96
0.01
0.01
-0.01
0.01
0.03

96
0.02
0.02
-0.01
0.02
0.11

96
0.02
0.02
-0.01
0.02
0.09

96
0.02
0.02
-0.01
0.02
0.07

96
0.02
0.02
-0.03
0.02
0.07

Table 19: Summary statistics of the MES based on daily observations and four candidates for MES based on weekly
observations

Page 98 of 128

Figure 21: Scatterplot of

Q4-2009 and MES for the different pre-crisis periods. MES is measured on a weekly basis.
The data points are broken down by institution type. The regression line is plotted on both plots together with the 95% and
99% confidence interval

Page 99 of 128

8.14 Exponential weighted moving average model (EWMA)

Equation 8-12 below presents how MES is calculated when the exponentially weighted
moving average model (EWMA) is applied. Whenever EWMA is applied the marginal expected
shortfall (MES) is denoted the weighted marginal expected shortfall (WMES). Equation 8-13
shows the weight for

8-12

8-13

where,

8.14.1 Weighted scheme algorithm

Given that some financial institutions are missing

, for certain weeks j in the pre-crisis

period (it could be that they have not been listed yet), some of the weights,
therefore condition

may not hold when only considering the weights were

missing. In order to avoid this caveat the weights that do not have a
and allocated equally onto the weights that do have
condition

, are lost and

holds after accounting for the missing

sum of weights for financial institution i as

is not

are summed up

. This is to make sure that

. By defining the leftover lump
this can be stated mathematically as:

Page 100 of 128

8-14

8-15

This leftover sum is thereafter allocated equally onto the weights that do have returns such
that the weights of the returns sums to unity. Given that financial institution i has some
missing returns, i.e.

, the final weights are found by applying the

following formula:

8-16

8-17

8-18

If the financial institution does not have any missing returns, i.e.

, then

equation 8-13 is applied directly to calculate the weights.

Page 101 of 128

8.14.2 Illustrative examples of s effect

By denoting the weights for

as

, the relationship between

and can be seen

more explicitly by considering the following time series:

8-19

The equations in 8-19 illustrate how the weights are a function of the previous weights and
the parameter . To exemplify how the weights decline exponentially Figure 22 below
presents the weights when is chosen to be 0.7 and 0.94. Figure 22 illustrates clearly that
recent returns are given a much lower weight when is 0.94 compared with when is 0.7.

Figure 22: The density function for the weights when

and when

Page 102 of 128

8.14.3 Illustrative examples of omitted weight density

The red areas in the left hand graph of Figure 23 illustrate graphically how much of the weight
density is omitted when

and when

considering that the total amount of

return weeks is 16 (note that the intervals on the y-axes differ and this needs to be accounted
for when comparing the graphs). The graphs on the right hand side show the cumulative
distribution function for the weight density function given that

and

. These

graphs show that it takes roughly 60 return weeks before the cumulative weights reach unity
when

, whereas it only takes around 16 return weeks before the cumulative weights

reach unity when

Figure 23: Top left: The density function for the weights when
. The gray area represents the total sum of weights
when 16 observations (returns) are used. The red area represents the total sum of weights that is omitted when 16
observations (returns) are used. Top right: The cumulative distribution when
. The dotted lines represent the total
sum of weights when 16 observations (returns) are used and when 60 observations (returns) are used. Bottom left: The
density function for the weights when
. The gray area represents the total sum of weights when 16 observations
(returns) are used. The red area represents the total sum of weights that is omitted when 16 observations (returns) are used.
Bottom right: The cumulative distribution when
. The dotted line represents the total sum of weights when 16
observations (returns) are used

Page 103 of 128

8.15 Scatterplot of RSESmax Q4-2009 and WMES

Figure 24: Scatterplot of

Q4-2009 and WMES for the different pre-crisis periods. WMES is measured on a weekly
basis using the exponentially weighted moving average model (EWMA) with a value of 0.7. The data points are broken
down by institution type. The regression line is plotted on both plots together with the 95% and 99% confidence interval

Page 104 of 128

8.16 Linear regression models - WMES

Dependent variable:
(1)
MES 6yr

(2)

RSESmax Q4-2009
(4)
(5)

(3)

(6)

(7)

(8)

-0.384

MES 5yr

-0.095

MES 4yr

-1.029

MES 3yr

-1.141

WMES 6yr

-1.140
-1.358*

WMES 5yr

-1.474*

WMES 4yr

-1.595**

WMES 3yr
Constant
Observations
R2
Adjusted R2

-0.674*** -0.681*** -0.662*** -0.655*** -0.648*** -0.644*** -0.640*** -0.638***

96
0.003
-0.008

96
0.0001
-0.011

96
0.010
-0.0001

96
0.018
0.007

96
0.026
0.016

96
0.036
0.025

96
0.039
0.029

96
0.045
0.035

p<0.1; **p<0.05; ***p<0.01

Note:

Dependent variable:
(8)
WMES 6yr 10%

(9)

-1.550

(10)

RSESmax Q4-2009
(11)
(12)
(13)

(14)

-1.556*

WMES 5yr 10%

-1.771*

WMES 4yr 10%

-1.902**

WMES 3yr 10%

-1.573*

WMES 6yr 15%

-1.840**

WMES 5yr 15%

-1.836**

WMES 4yr 15%

WMES 3yr 15%
Constant
Observations
R2
Adjusted R2
Note:

(15)

**

-1.198
-0.641

***

96
0.041
0.031

-0.643

***

96
0.039
0.029

-0.642

***

96
0.040
0.030

-0.640

***

96
0.047
0.037

-0.646

***

96
0.034
0.024

-0.644

***

96
0.044
0.034

-0.645

***

96
0.041
0.030

-0.661***
96
0.015
0.004

p<0.1; **p<0.05; ***p<0.01

Page 105 of 128

8.17 Explanatory power of other risk measures

Table 20: Test of other explanatory variables
Dependent variable:
(1)
-2.548***
WMES 3yr
LVG
ES 3yr
Vol 3yr
Beta 3yr
Debt-to-Equity
Debt-to-Asset
Fin Leverage
0.346***
Insurance
0.072
Inv Fund
0.123***
Real Estate
-0.649***
Constant

Observations
R2
Adjusted R2

(2)

(3)

RSESmax Q4-2009
(5)
(6)
(7)

(4)

(8)

(9)

(11)

-2.662** -2.320*** -1.196 -2.763*** -2.288*** -3.305***

0.003***

0.002** 0.003***
-1.376

2.225
-0.510

***

-0.005

-0.803***
-0.164***

0.004
-0.00002
-0.368*
0.003

0.302

***

0.097*
0.123

***

0.264

**

0.064
0.115

**

0.274

**

0.081
0.154

***

0.362

***

0.389

***

0.372

***

0.123**

0.125**

0.107**

***

***

***

0.135

0.210

0.154

0.326

***

0.079
0.133

0.354

***

0.039

**

0.158

***

0.320

***

0.379***

-0.175

0.104

0.012

0.185***

-0.755*** -0.635*** -0.607*** -0.648*** -0.638*** -0.694*** -0.690*** -0.644*** -0.323* -0.661***

96

96

96

96

96

96

96

77

73

96

74

0.192

0.181

0.120

0.176

0.190

0.346

0.267

0.253

0.274

0.223

0.273

0.156

0.145

0.081

0.139

0.154

0.286

0.226

0.201

0.219

0.180

Note:

(10)

**

p<0.1; p<0.05;

0.220
***

p<0.01

Table 20: Linear regression models comparing the explanatory power of WMES with the explanatory power of other risk
measures (model 1 model 6). Furthermore, the full linear regression model presented in equation 2-12 subsection 2.3 is
also tested in this table using different measure for leverage ratio. A closer description of the variables used in these
regression models is provided in this appendix. The full data sample is used in all regression models except model 8 where,
due to suspiciously large LVG values, Norwegian financial institutions have been excluded. The lack of observations in model
9 and model 11 is due to missing values for some financial institutions in the sample

The variables that are applied in Table 20 are all computed pre-crisis, i.e. before July 2007. In
order to have the financial leverage ratios as representative as possible, they are based on
balance sheet data from Q2-2007. Below is a short overview of how the variables specifically
are computed:

ES 3yr: the expected shortfall of the firm in its own left tail, i.e., the negative of the
financial institutions average stock return in its own 5% worst weeks (using 3 years
of data).

Page 106 of 128

Vol 3yr: annualized standard deviation of returns based on the weekly stock return of
the financial institution (using 3 years of data). The following formula has been
applied (Hull, 2010):

8-20

Beta 3yr: the covariance between the stock return of the financial institution and the
return of the market divided by the variance of the market returns (using 3 years of
data)

Debt-to-Equity: calculated as the sum of short-term and long-term borrowing divided

by total shareholders equity, multiplied by 100 (Bloombergs definition)

Debt-to-Assets: calculated as total liabilities divided by total assets85

Fin leverage: calculated as average total assets divided with average total common
equity

All regression models contain the full data sample, except model 8 where, due to suspiciously
large LVG values, Norwegian financial institutions have been excluded. The reason there are
some missing observations in model 9 and model 11 is due to lack of data availability for
some of the financial institutions.

85

Total liabilities is the sum of total deposits, short term borrowing, other short term borrowing, securities sold
with repo agreements, long-term borrowing and other long-term liabilities. Total assets is the total of all short
and long-term assets as reported on the balance sheet (Bloombergs definition)

Page 107 of 128

8.18 WMES by financial institution

WMES
Financial institution
Danske Bank
Nordea
Nykredit
Jyske Bank
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank
Roskilde Bank
Sparbank
Fionia Bank
Max Bank
Forstdernes Bank
stjydsk Bank
DiBa Bank
Aarhus Lokalbank
Skjern Bank
BankNordik
Sparekassen Lolland
Sparekassen Faaborg
EBH Bank
Djurslands Bank
Totalbanken
Ringkjbing Bank
Ringkjb Landbob
Nordjyske Bank
Danske Andelsk. Bank
Ln og Spar Bank
Nrresundby Bank
Sklskr Bank
Nordfyns Bank
Salling Bank
Vestfyns Bank
Hvidbjerg Bank
Svendborg Sparekasse
Jutlander Bank
Vordingborg Bank
Lolland Bank
Grnlandsbanken
Mns Bank
Sparekassen Hvetbo
Luxor-B
Smallcap Danmark
Tnder Bank
DeltaQ
Nwecap Holding
Kreditbanken
TK Development
BankTrelleborg
Topdanmark
Jeudan
Tryg
Realia
Lokalbanken i Nordsjl
Vinderup Bank
Alm. Brand Formue
Scandinavian PE
Fynske Bank

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
Yes
No
No
Yes
Yes
Yes
No
No
Yes
No
No
No
No
No
Yes
No
No
No
No
No
No
No
No
No
No
Yes
No
No
Yes
No
No
No
No
Yes
No
No
No
No
Yes
Yes
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G2
G3
G3
G3
G3
G3
G3

2006
3.06%
4.15%
4.23%
3.43%
3.74%
7.35%
3.86%
4.90%
7.22%
0.00%
2.52%
5.13%
5.07%
1.91%
5.27%
-0.10%
1.93%
0.58%
1.64%
0.00%
0.00%
0.55%
1.09%
0.56%
4.78%
1.82%
2.94%
1.80%
0.00%
0.28%
0.85%
0.99%
4.63%
0.80%
2.04%
0.06%
0.50%
0.00%
0.60%
-0.52%
0.29%
4.03%
0.00%
3.96%
5.25%
3.19%
0.00%
2.70%
-1.84%
6.57%
0.00%
4.49%
6.12%
4.10%
2.17%
2.63%
0.18%
4.30%
0.00%
0.50%

Q22007
3.57%
4.47%
5.82%
4.15%
4.51%
6.05%
3.30%
6.08%
7.54%
0.00%
2.78%
4.19%
4.27%
2.38%
5.37%
0.01%
-1.53%
2.15%
1.02%
0.00%
0.00%
1.41%
0.52%
0.61%
5.94%
3.02%
3.42%
3.37%
0.00%
0.82%
0.89%
0.34%
4.62%
0.12%
1.81%
2.92%
1.30%
-1.41%
0.63%
0.42%
0.95%
1.89%
0.00%
1.41%
4.81%
1.82%
0.00%
4.39%
-0.26%
7.17%
3.17%
5.45%
4.85%
5.74%
1.72%
1.44%
1.64%
3.46%
3.43%
1.30%

2007
2.60%
3.24%
5.81%
2.65%
3.15%
5.26%
1.88%
4.54%
5.47%
-0.45%
3.03%
3.71%
3.79%
2.10%
5.18%
1.65%
0.42%
2.01%
0.62%
9.38%
0.58%
1.66%
0.66%
0.56%
6.06%
2.77%
2.51%
3.24%
0.00%
0.80%
0.73%
-0.12%
3.21%
1.94%
1.54%
4.58%
1.14%
-1.13%
1.97%
3.64%
1.88%
0.94%
0.00%
1.61%
4.42%
1.79%
1.85%
4.38%
-0.86%
7.04%
2.12%
3.14%
3.70%
2.90%
-1.88%
1.40%
1.66%
3.60%
1.87%
1.14%

2008
14.65%
10.18%
6.82%
12.83%
15.32%
10.50%
13.71%
8.34%
15.15%
17.74%
25.96%
8.71%
3.35%
5.82%
3.06%
7.50%
6.07%
6.59%
6.15%
5.12%
3.16%
10.43%
7.19%
4.77%
5.02%
12.00%
10.54%
7.30%
0.00%
2.08%
5.42%
6.27%
9.08%
4.72%
3.26%
0.96%
3.09%
0.14%
0.55%
0.53%
9.48%
1.75%
8.73%
5.32%
3.60%
1.13%
3.02%
13.07%
6.12%
9.55%
0.00%
5.20%
0.42%
4.68%
7.41%
-0.29%
6.05%
4.42%
8.29%
3.09%

2009
14.18%
11.38%
6.72%
13.18%
15.59%
10.15%
9.93%
10.59%
10.87%
17.37%
47.12%
7.05%
2.73%
4.53%
1.80%
3.78%
1.46%
8.79%
5.30%
4.45%
3.72%
6.95%
9.96%
2.82%
5.77%
10.28%
9.83%
4.73%
0.00%
1.28%
3.69%
5.14%
5.40%
2.87%
0.92%
2.44%
2.64%
4.56%
1.61%
0.00%
8.72%
2.64%
7.21%
13.71%
3.51%
2.62%
4.56%
8.04%
4.42%
10.36%
0.00%
9.11%
0.77%
4.91%
8.05%
-1.15%
1.92%
8.17%
6.63%
2.64%

2010
13.58%
11.46%
8.55%
9.44%
14.52%
8.44%
10.13%
10.23%
12.98%
15.30%
47.12%
8.80%
14.71%
8.41%
1.80%
3.55%
-1.89%
5.35%
5.76%
4.97%
5.11%
5.31%
9.96%
3.34%
9.27%
9.44%
8.03%
4.97%
0.00%
1.03%
1.78%
6.44%
6.45%
4.34%
1.27%
4.28%
0.69%
6.65%
-0.11%
3.87%
3.55%
3.65%
0.19%
8.27%
4.55%
4.45%
4.34%
7.64%
3.72%
10.62%
0.00%
7.44%
2.15%
6.12%
-1.18%
-1.15%
5.33%
6.08%
7.76%
0.69%

2011
11.82%
9.06%
7.40%
10.42%
9.78%
4.31%
4.11%
6.07%
9.89%
10.42%
0.00%
8.09%
-6.28%
10.33%
0.00%
5.19%
5.88%
-1.07%
4.29%
5.47%
4.05%
2.64%
0.00%
0.50%
6.46%
0.00%
3.67%
5.21%
-1.93%
1.02%
-0.26%
2.65%
3.45%
0.01%
1.73%
2.69%
0.12%
-1.72%
-0.33%
3.11%
0.75%
1.19%
0.08%
3.95%
5.25%
1.79%
1.81%
8.52%
0.82%
9.25%
0.00%
4.82%
3.39%
3.59%
-1.16%
0.00%
1.35%
3.41%
2.83%
0.12%

2012
9.54%
7.20%
4.81%
7.49%
6.35%
1.54%
9.27%
3.99%
12.99%
10.42%
0.00%
2.10%
0.00%
8.10%
0.00%
5.98%
4.28%
-0.98%
2.99%
5.07%
6.60%
-1.17%
0.00%
1.41%
3.35%
0.00%
2.53%
4.80%
2.30%
0.28%
0.20%
6.15%
1.32%
2.80%
0.38%
8.85%
3.38%
-0.31%
2.13%
4.39%
1.98%
3.82%
3.67%
1.06%
3.59%
1.87%
2.91%
7.12%
1.48%
4.36%
0.00%
3.21%
1.46%
2.35%
1.91%
0.00%
4.24%
0.77%
1.58%
3.38%

Page 108 of 128

2013
9.30%
6.47%
3.48%
6.10%
5.20%
0.46%
8.57%
3.62%
0.00%
0.00%
0.00%
2.51%
0.00%
7.43%
0.00%
10.41%
6.93%
-1.13%
2.20%
3.05%
7.40%
-1.37%
0.00%
1.59%
2.08%
0.00%
1.75%
3.88%
1.96%
0.90%
1.78%
0.00%
1.42%
2.42%
1.19%
8.82%
4.00%
0.54%
3.53%
3.86%
1.58%
0.38%
3.26%
0.41%
2.09%
1.04%
-1.69%
7.13%
2.67%
3.18%
0.00%
2.24%
-0.07%
1.54%
3.96%
0.00%
3.66%
1.64%
0.44%
4.00%

8.19 SRISK by financial institution

SRISK (million DKK)
Financial institution
Danske Bank
Nordea
Jyske Bank
Nykredit
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank Danmark 2010
Sparbank
Roskilde Bank
Fionia Bank
Max Bank
Forstdernes Bank
stjydsk Bank
BankNordik
DiBa Bank
Sparekassen Lolland
Skjern Bank
Aarhus Lokalbank
Danske Andelskassers Bank
Sparekassen Faaborg
Djurslands Bank
Totalbanken
Nordjyske Bank
EBH Bank
Ringkjbing Bank
Ringkjbing Landbobank
Ln og Spar Bank
Salling Bank
Nordfyns Bank
Nrresundby Bank
Sklskr Bank
Vestfyns Bank
Jutlander Bank
Hvidbjerg Bank
Svendborg Sparekasse
Vordingborg Bank
Lolland Bank
Sparekassen Hvetbo
Grnlandsbanken
Mns Bank
Fynske Bank
Luxor-B
Vinderup Bank
Topdanmark
Alm. Brand Formue
Tryg
BankTrelleborg
Tnder Bank
Lokalbanken i Nordsjlland
Realia
Scandinavian Private Equity
Kreditbanken
Smallcap Danmark
Jeudan
TK Development
Nwecap Holding
DeltaQ

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
No
Yes
No
Yes
No
No
No
Yes
Yes
No
No
No
No
No
Yes
No
No
No
No
No
No
Yes
No
No
No
No
Yes
No
No
No
Yes
Yes
Yes
No
No
No
No
No
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3

2006
96,141
40,532
546
414
415
118
-

Q22007
128,793
69,579
2,415
94
161
-

2007
155,279
65,133
6,075
742
643
283
213
606
-

2008
265,304
232,252
15,909
14,717
10,741
4,256
2,225
2,715
2,658
1,439
1,207
4,055
2,274
682
942
280
432
327
280
202
220
151
239
743
696
679
64
103
320
93
22
20
7
27
-

2009
215,418
209,199
12,760
11,122
9,272
3,537
2,003
2,882
1,981
1,471
965
69
612
925
225
312
247
288
33
141
136
46
77
55
86
131
176
9
20
4
-

2010
217,705
241,132
11,205
10,636
8,068
3,414
2,162
2,471
1,935
2,097
892
703
318
88
329
304
419
58
153
169
94
80
116
35
207
25
138
40
35
-

2011
239,591
330,899
16,859
13,260
8,693
4,046
2,048
2,456
895
854
427
735
333
867
330
421
311
156
196
248
105
126
114
7
24
48
29
44
-

2012
226,391
268,637
13,750
10,483
7,317
3,219
2,193
1,420
786
441
779
312
982
269
646
277
170
122
151
142
156
74
14
74
147
58
31
41
48
45
17
3
-

2013
191,653
198,804
7,792
6,196
4,526
1,759
330
297
138
56
585
248
71
88
35
245
134
27
192
55
171
64
17
-

Page 109 of 128

8.20 SRISK% by financial institution

SRISK%
Financial institution
Danske Bank
Nordea
Jyske Bank
Nykredit
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank Danmark 2010
Sparbank
Roskilde Bank
Fionia Bank
Max Bank
Forstdernes Bank
stjydsk Bank
BankNordik
DiBa Bank
Sparekassen Lolland
Skjern Bank
Aarhus Lokalbank
Danske Andelskassers Bank
Sparekassen Faaborg
Djurslands Bank
Totalbanken
Nordjyske Bank
EBH Bank
Ringkjbing Bank
Ringkjbing Landbobank
Ln og Spar Bank
Salling Bank
Nordfyns Bank
Nrresundby Bank
Sklskr Bank
Vestfyns Bank
Jutlander Bank
Hvidbjerg Bank
Svendborg Sparekasse
Vordingborg Bank
Lolland Bank
Sparekassen Hvetbo
Grnlandsbanken
Mns Bank
Fynske Bank
Luxor-B
Vinderup Bank
Topdanmark
Alm. Brand Formue
Tryg
BankTrelleborg
Tnder Bank
Lokalbanken i Nordsjlland
Realia
Scandinavian Private Equity
Kreditbanken
Smallcap Danmark
Jeudan
TK Development
Nwecap Holding
DeltaQ

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
No
Yes
No
Yes
No
No
No
Yes
Yes
No
No
No
No
No
Yes
No
No
No
No
No
No
Yes
No
No
No
No
Yes
No
No
No
Yes
Yes
Yes
No
No
No
No
No
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3

2006
69.58%
29.34%
0.00%
0.40%
0.00%
0.30%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.30%
0.00%
0.09%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Q22007
64.06%
34.61%
0.00%
1.20%
0.00%
0.00%
0.00%
0.00%
0.05%
0.00%
0.00%
0.00%
0.08%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2007
67.82%
28.45%
0.00%
2.65%
0.00%
0.32%
0.00%
0.00%
0.28%
0.00%
0.00%
0.12%
0.09%
0.00%
0.26%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2008
46.85%
41.01%
2.81%
2.60%
1.90%
0.75%
0.39%
0.48%
0.47%
0.25%
0.21%
0.72%
0.40%
0.12%
0.17%
0.05%
0.00%
0.08%
0.00%
0.06%
0.05%
0.00%
0.04%
0.04%
0.03%
0.04%
0.13%
0.12%
0.12%
0.00%
0.01%
0.02%
0.06%
0.02%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2009
45.43%
44.12%
2.69%
2.35%
1.96%
0.75%
0.42%
0.61%
0.42%
0.31%
0.20%
0.00%
0.01%
0.13%
0.19%
0.05%
0.00%
0.07%
0.00%
0.05%
0.06%
0.00%
0.01%
0.03%
0.03%
0.01%
0.00%
0.00%
0.00%
0.02%
0.01%
0.02%
0.03%
0.04%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2010
43.11%
47.75%
2.22%
2.11%
1.60%
0.68%
0.43%
0.49%
0.38%
0.42%
0.18%
0.00%
0.00%
0.14%
0.00%
0.06%
0.02%
0.07%
0.00%
0.06%
0.08%
0.00%
0.01%
0.03%
0.03%
0.02%
0.00%
0.00%
0.00%
0.02%
0.00%
0.02%
0.01%
0.04%
0.00%
0.03%
0.01%
0.00%
0.01%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2011
38.39%
53.02%
2.70%
2.12%
1.39%
0.65%
0.33%
0.39%
0.00%
0.00%
0.14%
0.00%
0.00%
0.14%
0.00%
0.07%
0.12%
0.05%
0.14%
0.05%
0.07%
0.00%
0.05%
0.02%
0.03%
0.04%
0.00%
0.00%
0.00%
0.02%
0.02%
0.02%
0.00%
0.00%
0.00%
0.00%
0.01%
0.00%
0.00%
0.01%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2012
41.99%
49.82%
2.55%
1.94%
1.36%
0.60%
0.41%
0.26%
0.00%
0.00%
0.15%
0.00%
0.00%
0.00%
0.00%
0.08%
0.14%
0.06%
0.18%
0.05%
0.00%
0.12%
0.05%
0.03%
0.02%
0.03%
0.00%
0.00%
0.00%
0.03%
0.03%
0.01%
0.00%
0.00%
0.01%
0.03%
0.01%
0.01%
0.01%
0.01%
0.01%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Page 110 of 128

2013
46.35%
48.08%
1.88%
1.50%
1.09%
0.00%
0.43%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.08%
0.07%
0.03%
0.00%
0.01%
0.00%
0.14%
0.06%
0.02%
0.02%
0.01%
0.00%
0.00%
0.00%
0.06%
0.03%
0.01%
0.00%
0.00%
0.05%
0.00%
0.01%
0.04%
0.02%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

8.21 SRISK after including SEB, DNB and Handelsbanken

Similar to Figure 9, Figure 25 includes SEB, DNB and Handelsbanken. However, to make the
graphs easier to read the smaller financial institutions, Sydbank, Nykredit and Jyske Bank,
have been excluded in these graphs.

Figure 25: Left: Shows SRISK and total SRISK by financial institution and year. Right: Shows SRISK% by financial institutions
and year

Page 111 of 128

8.22 Comparing total systemic risk with total GDP

Figure 26: Upper: shows the total systemic risk (total SRISK) as a share of the annual GDP of Denmark. Lower: Shows the
total systemic risk (total SRISK) and annual GDP of Denmark in absolute terms. The annual GDP values are found on Statistics
Denmarks website: www.dst.dk/en

8.23 Percentage debt change for Danske Bank and Nordea

Figure 27: Left: Shows the year-to-year percentage debt change for Danske Bank and Nordea. Right: The year-to-year
percentage change are given as numbers

Page 112 of 128

8.24 RSRISK% by financial institution

RSRISK%
Financial institution
Danske Bank
Nordea
Jyske Bank
Nykredit
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank Danmark 2010
Sparbank
Roskilde Bank
Fionia Bank
Max Bank
Forstdernes Bank
stjydsk Bank
BankNordik
DiBa Bank
Sparekassen Lolland
Skjern Bank
Aarhus Lokalbank
Danske Andelskassers Bank
Sparekassen Faaborg
Djurslands Bank
Totalbanken
Nordjyske Bank
EBH Bank
Ringkjbing Bank
Ringkjbing Landbobank
Ln og Spar Bank
Salling Bank
Nordfyns Bank
Nrresundby Bank
Sklskr Bank
Vestfyns Bank
Jutlander Bank
Hvidbjerg Bank
Svendborg Sparekasse
Vordingborg Bank
Lolland Bank
Sparekassen Hvetbo
Grnlandsbanken
Mns Bank
Fynske Bank
Luxor-B
Vinderup Bank
Topdanmark
Alm. Brand Formue
Tryg
BankTrelleborg
Tnder Bank
Lokalbanken i Nordsjlland
Realia
Scandinavian Private Equity
Kreditbanken
Smallcap Danmark
Jeudan
TK Development
Nwecap Holding
DeltaQ

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
No
Yes
No
Yes
No
No
No
Yes
Yes
No
No
No
No
No
Yes
No
No
No
No
No
No
Yes
No
No
No
No
Yes
No
No
No
Yes
Yes
Yes
No
No
No
No
No
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3

2006
43.92%
19.16%
0.00%
6.19%
0.00%
8.46%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
17.53%
0.00%
4.73%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Q22007
45.02%
26.27%
0.00%
19.47%
0.00%
0.00%
0.00%
0.00%
3.49%
0.00%
0.00%
0.00%
5.76%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2007
28.05%
13.30%
0.00%
21.51%
0.00%
6.89%
0.00%
0.00%
12.45%
0.00%
0.00%
3.15%
3.99%
0.00%
10.65%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2008
4.26%
3.71%
3.82%
3.59%
3.92%
3.52%
4.07%
3.60%
4.35%
3.87%
3.79%
4.47%
3.96%
3.84%
1.69%
2.79%
0.00%
3.52%
0.00%
3.44%
3.39%
0.00%
1.62%
1.94%
2.96%
1.75%
4.47%
4.03%
2.14%
0.00%
1.73%
3.01%
1.93%
2.10%
0.71%
0.00%
1.41%
0.00%
0.00%
0.00%
0.23%
0.37%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2009
5.46%
4.27%
4.43%
4.09%
4.57%
4.35%
4.92%
4.96%
4.66%
5.50%
4.36%
0.00%
6.24%
5.04%
2.20%
3.02%
0.00%
3.77%
0.00%
4.00%
4.24%
0.00%
0.33%
1.82%
3.58%
0.41%
0.00%
0.00%
0.00%
0.62%
2.08%
3.50%
1.06%
4.14%
0.38%
0.00%
1.81%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.22%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2010
5.43%
4.39%
3.62%
4.10%
4.23%
4.10%
5.36%
4.31%
5.19%
5.76%
4.99%
0.00%
0.00%
5.35%
0.00%
3.85%
0.52%
3.83%
0.00%
4.60%
5.27%
0.00%
0.55%
1.94%
4.50%
0.80%
0.00%
0.00%
0.00%
0.66%
0.00%
4.28%
0.29%
5.07%
1.02%
0.91%
3.19%
0.00%
1.88%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2011
4.94%
4.32%
4.40%
4.06%
4.00%
4.17%
5.11%
4.04%
0.00%
0.00%
4.82%
0.00%
0.00%
5.33%
0.00%
4.37%
3.20%
4.56%
4.60%
4.62%
4.63%
0.00%
3.18%
1.73%
5.07%
2.25%
0.00%
0.00%
0.00%
0.74%
3.76%
3.84%
0.05%
0.00%
0.92%
0.00%
3.67%
0.00%
1.52%
2.09%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2012
5.13%
4.20%
4.23%
3.43%
3.80%
3.29%
5.25%
2.74%
0.00%
0.00%
4.78%
0.00%
0.00%
0.00%
0.00%
4.72%
3.72%
4.91%
5.93%
3.69%
0.00%
3.84%
3.62%
2.12%
4.20%
1.52%
0.00%
0.00%
0.00%
1.02%
4.26%
2.49%
0.13%
0.00%
2.03%
1.18%
4.83%
0.83%
2.68%
2.48%
2.09%
0.00%
0.00%
0.45%
0.00%
0.43%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Page 113 of 128

2013
7.22%
5.03%
3.55%
3.33%
3.69%
0.00%
7.80%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
7.78%
2.17%
3.11%
0.00%
1.29%
0.00%
6.54%
5.18%
1.34%
4.56%
0.51%
0.00%
0.00%
0.00%
2.39%
5.83%
1.44%
0.00%
0.00%
4.82%
0.00%
6.76%
7.54%
6.97%
0.00%
0.00%
0.00%
1.16%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

8.25 DA_RSRISK% by financial institution

DA_RSRISK%
Financial institution
Danske Bank
Nordea
Jyske Bank
Nykredit
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank Danmark 2010
Sparbank
Roskilde Bank
Fionia Bank
Max Bank
Forstdernes Bank
stjydsk Bank
BankNordik
DiBa Bank
Sparekassen Lolland
Skjern Bank
Aarhus Lokalbank
Danske Andelskassers Bank
Sparekassen Faaborg
Djurslands Bank
Totalbanken
Nordjyske Bank
EBH Bank
Ringkjbing Bank
Ringkjbing Landbobank
Ln og Spar Bank
Salling Bank
Nordfyns Bank
Nrresundby Bank
Sklskr Bank
Vestfyns Bank
Jutlander Bank
Hvidbjerg Bank
Svendborg Sparekasse
Vordingborg Bank
Lolland Bank
Sparekassen Hvetbo
Grnlandsbanken
Mns Bank
Fynske Bank
Luxor-B
Vinderup Bank
Topdanmark
Alm. Brand Formue
Tryg
BankTrelleborg
Tnder Bank
Lokalbanken i Nordsjlland
Realia
Scandinavian Private Equity
Kreditbanken
Smallcap Danmark
Jeudan
TK Development
Nwecap Holding
DeltaQ

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
No
Yes
No
Yes
No
No
No
Yes
Yes
No
No
No
No
No
Yes
No
No
No
No
No
No
Yes
No
No
No
No
Yes
No
No
No
Yes
Yes
Yes
No
No
No
No
No
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3

2006
27.26%
2.49%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.87%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Q22007
25.02%
6.27%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2007
15.55%
0.80%
0.00%
9.01%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2008
1.32%
0.77%
0.88%
0.64%
0.98%
0.58%
1.13%
0.66%
1.41%
0.93%
0.85%
1.53%
1.02%
0.90%
0.00%
0.00%
0.00%
0.58%
0.00%
0.50%
0.45%
0.00%
0.00%
0.00%
0.01%
0.00%
1.53%
1.09%
0.00%
0.00%
0.00%
0.07%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2009
2.13%
0.94%
1.09%
0.76%
1.23%
1.01%
1.59%
1.63%
1.33%
2.16%
1.03%
0.00%
2.90%
1.71%
0.00%
0.00%
0.00%
0.44%
0.00%
0.67%
0.91%
0.00%
0.00%
0.00%
0.24%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.16%
0.00%
0.81%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2010
1.98%
0.94%
0.17%
0.65%
0.78%
0.66%
1.91%
0.86%
1.74%
2.31%
1.54%
0.00%
0.00%
1.90%
0.00%
0.40%
0.00%
0.39%
0.00%
1.15%
1.82%
0.00%
0.00%
0.00%
1.05%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.83%
0.00%
1.62%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2011
1.36%
0.75%
0.83%
0.49%
0.43%
0.60%
1.54%
0.47%
0.00%
0.00%
1.25%
0.00%
0.00%
1.76%
0.00%
0.80%
0.00%
0.98%
1.03%
1.05%
1.06%
0.00%
0.00%
0.00%
1.50%
0.00%
0.00%
0.00%
0.00%
0.00%
0.19%
0.27%
0.00%
0.00%
0.00%
0.00%
0.10%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

2012
2.00%
1.07%
1.10%
0.31%
0.68%
0.16%
2.13%
0.00%
0.00%
0.00%
1.66%
0.00%
0.00%
0.00%
0.00%
1.59%
0.60%
1.79%
2.81%
0.57%
0.00%
0.71%
0.49%
0.00%
1.08%
0.00%
0.00%
0.00%
0.00%
0.00%
1.13%
0.00%
0.00%
0.00%
0.00%
0.00%
1.70%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Page 114 of 128

2013
2.87%
0.68%
0.00%
0.00%
0.00%
0.00%
3.45%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
3.43%
0.00%
0.00%
0.00%
0.00%
0.00%
2.20%
0.83%
0.00%
0.21%
0.00%
0.00%
0.00%
0.00%
0.00%
1.48%
0.00%
0.00%
0.00%
0.47%
0.00%
2.41%
3.19%
2.63%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

8.26 RSRISK for financial institution in other category

RSRISK% for financial institutions in Figure 12 (right)
RSRISK%
Financial institution
Fionia Bank
Amargerbanken
Roskilde Bank
EIK Bank Danmark 2010
Max Bank
Sparekassen Lolland
Vestjysk Bank

Default
Yes
Yes
Yes
Yes
Yes
Yes
No

Asset
group
G2
G2
G2
G2
G3
G3
G2

2006
18%
0%
0%
0%
0%
0%
0%

Q22007
6%
3%
0%
0%
0%
0%
0%

2007
4%
12%
3%
0%
0%
0%
0%

2008
4%
4%
4%
4%
4%
0%
4%

2009
6%
5%
0%
5%
5%
0%
5%

2010
0%
5%
0%
6%
5%
0%
5%

2011
0%
0%
0%
0%
5%
5%
5%

2012
0%
0%
0%
0%
0%
6%
5%

2013
0%
0%
0%
0%
0%
0%
8%

Table 21: RSRISK% for financial institutions that are in this right hand graph on Figure 12. The bold numbers are the ones
represented in the graph

8.27 NIRO Index for financial institutions with abnormal %RSRISK

NIRO Index
Financial institution
Vestjysk Bank
stjydsk Bank
Svendborg Sparekasse
Danske Bank
Vordingborg Bank
Hvidbjerg Bank
Danske Andelskassers Bank
Salling Bank
Sparekassen Faaborg
Nordea
Vestfyns Bank
Totalbanken

2011
510
435
275
372.5
477.5
505
457.5
472.5
370
365
405
510

2012
567
490
342.5
347.5
522.5
515
435
480
512.5
362.5
330
515

2013
510
532.5
1)
325
2)
512.5
517.5
452.5
3)
337.5
4)
472.5

Table 22: NIRO Index for financial institutions with abnormal %RSRISK in 2013. 1) Svendborg Sparekassen merged with
Vestfyns Bank to become Fynske Bank in November 2013. 2) Vordingborg Bank and Lollands Bank merged in October 2013.
3) Sparekassen Faaborg was acquired by Sparekassen Sjlland in October 2013. 4) Vestfyns Bank merged with Svendborg
Sparekassen to become Fynske Bank in November 2013. In all these cases the 2012 NIRO index is represented as the NIRO
index for the correspondinf financial institution in Table 7

The NIRO Index in computed annually by the Danish corporate consulting firm NIRO Invest.
The index builds on 19-21 key financial indicators (e.g. equity ratio, solvency ratio, annual
results and loan growth) that are consolidated, using a pure mathematically approach, into
one index number. This index number reflects the overall risk of the financial institution. As a
rule of thumb, a financial institution with a NIRO Index that is larger than 475 is considered to
be especially risky. See more on http://www.niroinvest.dk

Page 115 of 128

8.28 Ratio between actual debt-to-equity and Levmax

Ratio between actual debt-to-equity ratio and Levmax
Financial institution
Danske Bank
Nordea
Jyske Bank
Nykredit
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank Danmark 2010
Sparbank
Roskilde Bank
Fionia Bank
Max Bank
Forstdernes Bank
stjydsk Bank
BankNordik
DiBa Bank
Sparekassen Lolland
Skjern Bank
Aarhus Lokalbank
Danske Andelskassers Bank
Sparekassen Faaborg
Djurslands Bank
Totalbanken
Nordjyske Bank
EBH Bank
Ringkjbing Bank
Ringkjbing Landbobank
Ln og Spar Bank
Salling Bank
Nordfyns Bank
Nrresundby Bank
Sklskr Bank
Vestfyns Bank
Jutlander Bank
Hvidbjerg Bank
Svendborg Sparekasse
Vordingborg Bank
Lolland Bank
Sparekassen Hvetbo
Grnlandsbanken
Mns Bank
Fynske Bank
Luxor-B
Vinderup Bank
Topdanmark
Alm. Brand Formue
Tryg
BankTrelleborg
Tnder Bank
Lokalbanken i Nordsjlland
Realia
Scandinavian Private Equity
Kreditbanken
Smallcap Danmark
Jeudan
TK Development
Nwecap Holding
DeltaQ

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Yes
No
Yes
No
Yes
No
No
No
Yes
Yes
No
No
No
No
No
Yes
No
No
No
No
No
No
Yes
No
No
No
No
Yes
No
No
No
Yes
Yes
Yes
No
No
No
No
No
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G3
G2
G3
G3
G3
G3
G3
G3

Q22007
1.95
1.32
0.74
1.16
0.69
0.87
0.53
0.67
0.90

0.43

0.28

0.41

0.39
0.52

2007
2.25
1.27
0.88
1.66
0.88
1.05
0.62
0.79
1.22
0.36
0.75
0.97
0.98
0.53
1.16
0.66
0.72
0.41
0.25
0.61
0.55

G3
G3
G3
G3
G3
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3
G2

0.21
0.41
0.18
0.31
0.16
0.46
0.27
0.51
0.42
0.55
0.39
0.30
0.38

0.22

0.16
0.41
0.17
0.42
0.13
0.54
0.30
0.50
0.35
0.47
0.39
0.30
0.37
0.16
0.40
0.22
0.28
0.23

0.21
0.44
0.12
0.45
0.15
0.85
0.38
0.56
0.55
0.48
0.41
0.39
0.44
0.17
0.49
0.23
0.34
0.36

0.19
0.32
0.19
0.10
0.19
0.23
0.70
0.12

0.13
0.27
0.21
0.09
0.20
0.28
0.22
0.14

0.19
0.31
0.23
0.12
0.23
0.31
0.80
0.13

G3
G3
G3

0.35
0.33
0.02

0.40
0.33
0.04

0.47
0.36
0.02

G3
G3
G3
G3
G3

2006
1.65
1.12
0.62
0.96
0.60
0.95
0.49
0.48
0.73
0.58
0.35
1.09
0.36
0.93

0.29

0.16
0.01
0.11
0.13
0.01

0.58
0.49
0.96
0.52
0.81
0.41

0.19
0.01
0.14
0.11
0.05

0.24
0.01
0.13
0.17
0.07

2008
20.79
5.71
6.68
4.89
7.85
4.51
10.78
4.98
35.51
7.13
6.41
3,210.7
8.52
9
6.89
1.51
2.52
0.82
4.56
0.57
4.21
3.99
1.40
1.65
2.83
1.51
2,786.6
9.80
8
1.74
0.86
1.51
2.90
1.64
1.76
1.09
0.47
1.37
0.41
0.60
0.70
0.90
0.93
0.81
0.53
0.50
0.66
0.53
0.24
0.15

2009
7.74
2.98
3.23
2.77
3.48
3.12
4.55
4.68
3.76
8.06
3.17
465.71
5.07
1.45
1.83
0.72
2.43
0.58
2.67
2.96

2010
6.37
3.01
2.15
2.63
2.73
2.64
6.00
2.90
5.08
9.75
4.40

2011
8.88
4.38
4.68
3.60
3.44
3.92
12.64
3.57

2012
5.46
2.92
2.96
2.11
2.43
2.02
6.16
1.67

7.47

4.18

5.95

25.21

2.41
0.97
2.43
0.73
3.43
5.53

4.58
2.25
5.47
5.74
5.85
5.98
0.83
2.25
1.37
11.59
1.57

3.97
2.36
4.59
20.11
2.35

4.95
1.19
1.34

2.50
2.30
1.43
2.96
1.21

3.00
2.08
1.07
1.80
0.95

0.54
1.07
3.02
3.15
0.93

0.38
1.11
3.05
1.58
0.94

0.29
1.24
2.43
1.09
0.76

1.11
0.76
2.85
0.70
1.30
1.50
0.80
0.64
0.86
0.70
0.24
0.75
0.48
0.33
0.23

1.40
1.15
4.27
1.05
1.66
1.55
1.40
0.36

1.91
0.81
3.18
4.44
3.49
0.86

0.92
1.31
2.22
0.96

0.98
1.33
3.22
1.03

0.83
1.02
1.40
2.15
1.10
2.85
0.98
0.65
1.31
0.63
0.76
0.67

0.62
1.03

0.75
0.74
0.57
0.83
0.39
0.67
0.42
0.18

0.46
0.79
0.46
0.39
0.58
0.57
0.37
0.32

0.00

0.00

0.02
0.26
0.62
0.56
0.17

0.03
0.21
0.46
0.66
0.15

2.89
0.96
4.67
1.10
1.04
1.88
0.52
1.34
0.84

0.98
0.17
0.97
0.33
0.26
0.16

2013
3.80
1.96
1.46
1.42
1.50
0.91
5.04
0.87

1.06

0.28
1.05
0.44
0.12
0.30
0.30
0.12

0.70
0.52
0.01
0.63
0.01
0.17
0.71
0.77

0.00
0.65
0.02
0.29
0.72
0.84
0.15

0.15
0.00
0.68
0.01
0.25
0.69
0.22

Page 116 of 128

0.19
0.00
0.64
0.03
0.15
0.42
0.14
0.16

8.29 Computing SRISK by changing k

Remember from equation 2-14 that

can be stated as:

8-21

Now substitute the expression found for

in equation 6-2 into equation 8-21:

8-22

This shows how SRISK can be computed directly by changing k and assuming that the other
variables are stay fixed.

8.30 EURIBOR EONIA spread

The graphs on the left hand side of Figure 28 below shows the 3 month and 6 month EURIBOR
and EONIA. The spread between these two rates, illustrated on the graphs on the right hand
side, represent the general liquidity premium that exists on the market. Notice how this
premium peaks around the 2007-2009 financial crisis reflecting the uncertainty that existed
during this period. This period was characteristic by the fact that borrowers were reluctant to
lend out money and as a result the market liquidity dried up.

Page 117 of 128

Figure 28: Left: The upper graph shows the 3 month EURIBOR and 3 month EONIA. The lower graph shows the 6 month
EURIBOR and 6 month EONIA. Right: The upper graph shows the spread between the 3 month EURIBOR and the 3 month
EONIA. The lower graph shows the spread between the 6 month EURIBOR and the 6 month EONIA. These spread represent
the general liquidity premium on the market

Figure 28 shows also that the spread between 3 month EURIBOR and 3 month EONIA is
almost identical as the spread between 3 month EURIBOR and 3 month EONIA. The only clear
deviation is found in end 2011/beginning 2012 were the 6 month spread is larger. However,
the clear correlation between these two spreads indicates that both maturities can be used to
reflect the general liquidity premium on the market. Since the credit default swap (CDS)
spreads are only found with 6 month maturity, it is more consist to use the 6 month
EURIBOR-EONIA spread when consolidating these two components into one funding liquidity
measure for the financial institution. Therefore, the 6 month EURIBOR-EONIA spread is used
in this thesis.

Page 118 of 128

8.31 SRISK under the extended model

To find as expression for SRISK under the extended model the same steps are performed as in
section 2.3. First the expression for the working capital denoted in equation 6-8 is rewritten
in the following way:

8-23

From this expression the SES measure can be found as in section 2.3, where the same
arguments have been applied:

8-24

Finally, the SRISK measure is found by considering the long run effects of a crisis by applying
LRMES instead of MES as well as imposing a lower boundary of zero systemic risk (see section
2.4):

Page 119 of 128

8-25

8.32 The impact of changing

- an analytical approach

Since the purpose of this derivation is to measure the impact of a change in

assume for

simplicity that the financial institution cannot raise capital on the equity market, i.e.,
Consider now the difference between SRISK computed as in section 2 (
computed as in section 6.3 (

) and SRISK

):

8-26

Assume now that the financial institution has put some capital aside such that CCB>0.
Remember that the fraction, , that is put aside as countercyclical capital buffer needs to be
taken from the largest market value of equity that the financial institution has had over the
last five years. Denote this maximum value as

. Now the expression in equation

8-26 can be rewritten as:

8-27

From this expression it is clear that impact from including a countercyclical capital buffer
depends first and foremost on the difference in market value of equity when the
Page 120 of 128

countercyclical capital buffer is put aside,

time t,

, and the market value of equity at

. Since the countercyclical capital buffer only is considered when the market growth

is above average, it is natural to assume that

is larger than

(especially if the

system is going through a crisis period at time t). Interestingly, the impact of having a
countercyclical capital buffer is increasing in

. This implies that the countercyclical

capital buffer has a larger effect on the highly interconnected financial institutions indicating
that a non-uniform approach might be useful when implementing the countercyclical capital
buffer. Finally, given that expression in the brackets is positive, an increase in implies that
SRISK will decrease, which is in line with the findings presented in section 6.3.

Page 121 of 128

8.33 SRISK under the extended model

SRISK extended model (
Financial institution
Danske Bank
Nordea
Nykredit
Jyske Bank
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank Danmark 2010
Roskilde Bank
Sparbank
Fionia Bank
Max Bank
Forstdernes Bank
stjydsk Bank
DiBa Bank
Aarhus Lokalbank
Skjern Bank
BankNordik
Sparekassen Lolland
Sparekassen Faaborg
EBH Bank
Djurslands Bank
Totalbanken
Ringkjbing Bank
Ringkjbing Landbobank
Nordjyske Bank
Danske Andelskassers Bank
Ln og Spar Bank
Nrresundby Bank
Sklskr Bank
Nordfyns Bank
Salling Bank
Vestfyns Bank
Hvidbjerg Bank
Svendborg Sparekasse
Jutlander Bank
Vordingborg Bank
Lolland Bank
Grnlandsbanken
Mns Bank
Sparekassen Hvetbo
Luxor-B
Smallcap Danmark
Tnder Bank
DeltaQ
Nwecap Holding
Kreditbanken
TK Development
BankTrelleborg
Topdanmark
Jeudan
Tryg
Realia
Lokalbanken i Nordsjlland
Vinderup Bank
Alm. Brand Formue
Scandinavian Private Equity
Fynske Bank

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
Yes
No
No
Yes
Yes
Yes
No
No
Yes
No
No
No
No
No
Yes
No
No
No
No
No
No
No
No
No
No
Yes
No
No
Yes
No
No
No
No
Yes
No
No
No
No
Yes
Yes
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3

2006
86,503
27,743
83
261
-

2007
145,762
50,900
5,427
336
452
27
415
-

2008
260,751
224,194
14,261
15,173
10,206
4,011
2,146
2,462
2,551
1,425
3,828
1,130
2,187
641
778
253
394
266
302
134
650
182
110
657
503
179

2009
210,140
199,095
10,568
11,920
8,662
3,275
1,911
2,626
1,848
1,459

2010
212,090
230,477
10,084
10,208
7,427
3,135
2,075
2,196
1,812
2,071

2011
234,368
320,759
12,763
16,056
8,080
3,793
1,973
2,193

2012
221,729
256,545
9,811
13,035
6,822
2,994
2,147
1,273

2013
186,274
184,245
5,336
6,754
3,904
1,713
-

879
570
754
195
270
271
220
-

814

822

758

662

818

289
287
404
278
9
-

403
298
407
307
675
819
248

426
302

319
119

255
718
939
243

33
213

101
94

112
128

115
158

143
115

39
79

20

261
75
94
52
8
14
-

13
61
158
76
42
15
-

16
192
107

189
43
-

106
617
88
-

560
190
-

66
149
63
56
11
74
36
40
-

16
127
178
53
158
59
7

105
117
11
44
18
30
-

213

G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3

G3
G3
G3

G2
G3
G2
G3
G3
G3
G3

G3

11
35
30
24
-

31
-

Page 122 of 128

SRISK extended model (

Financial institution
Danske Bank
Nordea
Nykredit
Jyske Bank
Sydbank
Spar Nord
Vestjysk Bank
Alm. Brand
Amargerbanken
EIK Bank Danmark 2010
Roskilde Bank
Sparbank
Fionia Bank
Max Bank
Forstdernes Bank
stjydsk Bank
DiBa Bank
Aarhus Lokalbank
Skjern Bank
BankNordik
Sparekassen Lolland
Sparekassen Faaborg
EBH Bank
Djurslands Bank
Totalbanken
Ringkjbing Bank
Ringkjbing Landbobank
Nordjyske Bank
Danske Andelskassers Bank
Ln og Spar Bank
Nrresundby Bank
Sklskr Bank
Nordfyns Bank
Salling Bank
Vestfyns Bank
Hvidbjerg Bank
Svendborg Sparekasse
Jutlander Bank
Vordingborg Bank
Lolland Bank
Grnlandsbanken
Mns Bank
Sparekassen Hvetbo
Luxor-B
Smallcap Danmark
Tnder Bank
DeltaQ
Nwecap Holding
Kreditbanken
TK Development
BankTrelleborg
Topdanmark
Jeudan
Tryg
Realia
Lokalbanken i Nordsjlland
Vinderup Bank
Alm. Brand Formue
Scandinavian Private Equity
Fynske Bank

Default
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
Yes
No
No
Yes
Yes
Yes
No
No
Yes
No
No
No
No
No
Yes
No
No
No
No
No
No
No
No
No
No
Yes
No
No
Yes
No
No
No
No
Yes
No
No
No
No
Yes
Yes
No
No
No

Asset
group
G1
G1
G1
G1
G1
G2
G2
G2
G2
G2
G2
G2
G2
G3
G2
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G2
G3

2006
86,096
27,533
71
250
-

2007
144,591
49,205
5,324
250
393
13
377
-

2008
257,027
219,322
14,058
14,610
9,766
3,842
2,082
2,253
2,449
1,425
3,601
1,068
2,122
608
727
238
366
257
284
89
558
164
74
622
378
144

2009
206,797
195,304
10,418
11,412
8,261
3,115
1,854
2,419
1,759
1,459

2010
208,928
226,986
9,934
9,783
7,043
2,985
2,016
2,000
1,719
2,060

2011
231,023
316,759
12,588
15,533
7,684
3,631
1,908
1,992

2012
220,355
253,468
9,743
12,769
6,652
2,979
2,130
1,256

2013
185,267
182,432
5,319
6,654
3,800
1,696
-

822
538
707
182
244
264
203
-

753

758

746

629

783

275
261
396
261
1
-

387
268
399
288
652
782
201

422
299

313
120

255
695
899
224

36
202

84
58

96
91

99
120

140
113

39
78

230
64
88
47
3
12
-

36
147
71
38
13
-

3
180
101

155
29
-

94
617
87
-

555
189
-

66
147
63
55
5
46
34
37
-

17
126
179
52
149
57
7

99
111
6
41
13
20
-

194

G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3
G3

G3
G3
G3

G2
G3
G2
G3
G3
G3
G3

G3

6
32
19
-

24
-

Page 123 of 128

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Figure 29: End page

Page 128 of 128