Shocks at large banks and banking sector distress: the Banking Granular Residual

Sven Blank (), Claudia M. Buch and Katja Neugebauer

No 2009,04, Discussion Paper Series 2: Banking and Financial Studies from Deutsche Bundesbank, Research Centre

Abstract: Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix (2008a) and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2007). We find that positive shocks at large banks reduce the probability of distress of small banks.

Keywords: Banking sector distress; size effects; shock propagation; Granular Residual (search for similar items in EconPapers)
JEL-codes: E44 E52 E32 G21 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-bec, nep-mac, nep-reg and nep-rmg
Date: 2009

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Persistent link: http://EconPapers.repec.org/RePEc:zbw:bubdp2:200904

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