Do bank capital and liquidity truly shield against systemic risk: evidence from the global banking sector

Nikita Sharma () and Sonali Jain ()
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Nikita Sharma: Indian Institute of Technology Delhi
Sonali Jain: Indian Institute of Technology Delhi

Journal of Regulatory Economics, 2025, vol. 68, issue 2, No 4, 173-230

Abstract: Abstract Understanding whether traditional buffers like capital and liquidity safeguard the banks against systemic risk is crucial for well-informed regulatory measures and adjusting the current policies. In addition, the rising level of distressed assets in the banking sector has significant concerns regarding systemic risk, primarily because they can compromise the stability and resilience of banking institutions, which could trigger a ripple effect across the broader economy. Hence, this study examines the impact of bank capital, liquidity, and non-performing loans on systemic risk by employing two novel metrics of systemic risk: ∆CoVaR (contribution) and SRISK (exposure). Using the Ordinary Least Squares (OLS) and Generalised Method of Moments (GMM) techniques on a sample of 169 big banks from the top twenty-five economies of the world and a sample period from 2007 to 2021, the findings indicate that the impact of bank capital on systemic risk contribution is more pronounced for emerging economies than for advanced economies. The study observes a weak relationship between bank liquidity and systemic risk, suggesting that more advanced measures are needed to mitigate systemic risk. Non-performing loans contribute considerably to systemic risk contribution and exposure, highlighting the need for effective credit risk management and better asset quality norms.

Keywords: Systemic risk; Financial crisis; Too-big-to-fail; Generalised methods of moments; NSFR (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s11149-025-09492-x

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