Systemic Risk for Financial Institutions in the Major Petroleum-based Economies: The Role of Oil

We examine the relationship between oil returns and systemic risk of financial institutions in major petroleum-based economies. By estimating Delta CoVaR, we observe the presence of remarkable increases in risk levels during the financial crises and achieve a better risk measurement when oil returns are included in the risk functions. Moreover, the estimated spread between the CoVaR without and with oil returns is absorbed in a time range that is longer than the duration of the oil shocks. This indicates that drops in oil prices which have a longer effect on risk and financial institutions require more time to account for their impact. Policy implications are also provided.