The role of investment banking in systemic risk profiles. Evidence from a panel of EU banking sectors

Renata Karkowska

No 22015, Faculty of Management Working Paper Series from University of Warsaw, Faculty of Management

Abstract: The goal of this study is to identify empirically how non-traditional activities affect directly the risk profiles and profitability of the banking sector. Through a dataset that covers 2678 European banks spanning the period 1996–2011 and the methodology of panel regression, the empirical findings document that investment banks have a negative effect on systemic risk in the banking sector. To show the heterogeneity of systemic risk determinants, the study sample was divided according to the economic development of a country into two groups: advanced and developing countries. We examine the implications of banks’ activity and risk-taking that manifest themselves as spreading and growing instability in the banking system. Then we explore the implications of the interaction between banking risk and structural, macroeconomic and financial market determinants. The findings have implications for both bank risk management and regulators. This paper advances the agenda of making macroprudential policy operational.

Keywords: systemic risk; investment banking; emerging markets; credit risk; liquidity; bank solvency; instability (search for similar items in EconPapers)
JEL-codes: F36 F65 G21 G32 G33 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2015-05
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-cse
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