By Giovanni Covi, James Brookes and Charumathi Raja
How banks are exposed to the financial system and real-economy determines concentration risk and interconnectedness in the banking sector, and in turn, the severity of tail-events. We construct the Global Network data set, a comprehensive exposure-based data set of the UK banking sector, updated quarterly, covering roughly 90% of total assets. We use it to study the UK banking system’s microstructure and estimate the likelihood and severity of tail-events. We find that during the Covid-19 (Covid) pandemic, the likelihood and severity of tail-events in the UK banking sector increased. The probability of an extreme stress event with losses above £91 billion (roughly 19% of CET1 capital) increased from 1% before the pandemic to 4.1% in 2020 Q2, subsequently falling to 1.7% in 2021 Q4.