Exploring the Systemic Risk of Domestic Banks with ΔCoVaR and Elastic-Net

We analyze the systemic risk of Italian banks with the Delta CoVaR from a bivariate normal GARCH model. The results show that it is a good measure of systemic risk and is applicable to the ranking of Italian other systemically important institutions. Using an elastic-net approach, we identify the balance sheet and market variables that explain the Delta CoVaR of Italian banks. The analysis confirms that these variables are key determinants of systemic importance and highlights how higher capitalization is beneficial to tackling systemic risk. And, we detect a connection between Delta CoVaR and some variables for trading and investment banking.