An Analysis Of Systemic Risk And Macroprudential Capital Policies And Their Application In The Kenyan Banking System

As a consequence of the sub-prime crisis of 2007-2009 and the sovereign debt crisis that followed,systemic risk in the finance industry has become a big topic in academic and policy circles.Systemic Risk has the potential to cause significant damage to a financial sector.However,in developing countries,minimal research has been conducted in the area of Systemic Risk and Macroprudential Policies.The importance of this thesis is apparent because it is the first time that this type of research has been done in East and Central Africa.Firstly,this paper puts forward the framework of systemic risk assessment.Then,on the basis of the framework of systemic risk assessment,it puts forward the framework of macro-prudential supervision.Subsequently,it empirically studies which banks in Kenya's banking system will default and may lead to contagious defaults in Kenya's banking industry.Then the proposed macroprudential regulatory framework is used to reduce the systemic risk of Kenya's banking system,which proves the feasibility of the macroprudential regulatory framework.At present,the literature on systemic risk and macro-prudential supervision is limited to developed countries.Furthermore,the methods used in measuring systemic risk in the current literature are deficient because they measure a financial institution's loss only if the system is in standard time,and do not take into account a real dynamic environment.In addition,in the estimation methods of bank network,the maximum entropy estimation method is used,which will underestimate the systemic risk of banks.The network structure of the interbank system in the Kenyan banking sector,which can be estimated by the Maximum Entropy Method,and also the Minimum density approach.This thesis is structured into 7 chapters,the first is the introduction of the research area with a background of the studies of Systemic Risk and Macroprudential Policies that include the significance of the study,the problem definition,the innovation of the study and objectives.The second chapter covers the Literature Review of the research area,and ultimately deduces the limitations of the current literature as a conclusion.Chapter 3 outlines the dynamic theoretical model for assessing systemic risk followed by the fourth chapter that has the data information that is used in the analysis of the results for the assessment of systemic risk in Kenyan banking sector.Chapter 5 proposes a dynamic theory model for Macroprudential Capital policy analysis and Chapter 6 conducts empirical research on the basis of data and the proposed framework.Finally,in Chapter 7 there is the conclusion and recommendations as well as suggested future studies.The key findings of the assessment of systemic risk in the Kenyan banking sector include the following.The theoretical default analysis shows that the Kenyan banking system has contagious risk.Further stress test proved that the KCB bank theoretically caused a few contagious defaults due to unusually high interconnectedness.Interconnectedness analysis showed that KCB and Equity bank are considered Systematically Important Banks(SIBs).The findings for the Macroprudential Capital Requirements show that where shocks are imposed on the Kenyan banking system,it was found that most banks held minimal capital on all risk allocation mechanisms and need to improve their capital adequacy ratio.The results show that Equity bank was the weakest bank in the system with a high default probability in all years except 2015.The risk allocation mechanisms ?CoVaR and Incremental VAR decrease the average default probability the most.It is ultimately apparent that across all risk allocation mechanisms,macroprudential capital requirements reduce default probabilities of individual banks and the entire banking system.One of the main objectives of this thesis is to enhance the stability of the Kenyan banking system.To be able to achieve this objective,there is a need to apply systemic risk assessment practices.It is found that risk allocation mechanisms can improve the stability of the system and normalize the financial system from a macroprudential perspective.This thesis can provide policy recommendations for the monitoring system of the Central Bank of Kenya(regulatory body)as well as the implementation of other policies.