Drivers of systemic risk in emerging markets: portfolio risk and risk amplification in the Thai banking and insurance sectors

Abstract

This study examines the drivers of systemic risk in the Thai banking and insurance sectors using a panel of listed financial institutions on the Stock Exchange of Thailand from Q1 2014 to Q4 2024. Systemic risk is measured along two dimensions — a firm's contribution to system-wide distress (ΔCoVaR) and its exposure to systemic shocks (MES) — alongside conditional capital shortfall (SRISK). Panel fixed-effects regressions test four hypotheses linking structural, fundamental, and crisis-related factors to these measures. For the banking sector, leverage emerges as the principal determinant of capital shortfall (SRISK), while market valuation is associated with greater market exposure (MES) and lower capital shortfall (SRISK). In contrast, a bank's contribution to systemic distress (ΔCoVaR) is driven primarily by the interaction between portfolio risk and the COVID-19 crisis — within R-squared rises sharply from about 1% to over 30% once this interaction is included — supporting the view that crisis amplification, rather than structural characteristics, dominates risk transmission for banks. For the insurance sector, results point to a different pathway: systemic risk is driven by capital structure and fundamental solvency rather than crisis amplification. Leverage and the loss ratio are robust positive determinants of capital shortfall, consistent with Hypotheses 1 and 2. Contrary to expectation, insurers with stronger solvency (higher Z-scores) exhibit higher, not lower, capital shortfalls — likely because such insurers hold substantial policy reserves, whose debt-side weight in the SRISK formula can outweigh the benefit of improved solvency. These findings suggest that capital adequacy regulation calibrated to leverage and solvency ratios may be more relevant to capital-shortfall risk than to market contagion risk, particularly for banks during crises — with potential relevance to macroprudential frameworks overseen by the Bank of Thailand and the Office of Insurance Commission.