Systemic Risk and Bank Size

Simone Varotto () and Lei Zhao

ICMA Centre Discussion Papers in Finance from Henley Business School, University of Reading

Abstract: In this paper we analyse aggregate and firm level systemic risk for US and European banks from 2004 to 2012. We observe that common systemic risk indicators are primarily driven by firm size which implies an overriding concern for 'too-big-to-fail' institutions. However, smaller banks may still pose considerable systemic threats, as exemplified by the Northern Rock debacle in 2007. By introducing a simple standardisation, we obtain a new risk measure that identifies Northern Rock as a top ranking systemic institution up to 4 quarters before its bailout. The new indicator also appears to have a superior ability to predict which banks would be affected by the most severe stock price contractions during the 2007-2009 sub-prime crisis. In addition we find that a bank's balance sheet characteristics can help to forecast its systemic importance and, as a result, may be useful early warning indicators. Interestingly, the systemic risk of US and European banks appears to be driven by different factors.

Keywords: systemic risk; financial crisis; bank regulation; contingent claim analysis (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2014-12
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
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Citations: View citations in EconPapers (1)

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Journal Article: Systemic risk and bank size (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:rdg:icmadp:icma-dp2014-17

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