This was part of Systemic Risk and Stress Testing

Measuring Capital at Risk in the UK Banking Sector

Giovanni Covi, Bank of England

Friday, April 8, 2022

Abstract: In this paper we construct and analyse the UK banking system’s Global Network of granular exposures which captures roughly 92% of the UK banking system’s total assets for the period Q1-2018 to Q3-2021. We thus study the microstructure of UK banking system focusing on the role played by concentration risk and interconnectedness across sectors. We then estimate the quarterly evolution of expected losses (Capital at Risk) for the UK banking sector, and via Monte Carlo simulations the stochastic distribution of UK banks’ losses to study the severity and likelihood of tail-events (Conditional Capital at Risk). In the end, we provide insights on the impact of the Covid-19 crisis on UK banking system’s financial stability as well of climate-related financial risks.