ON THE IMPORTANCE OF TRADITIONAL LENDING ACTIVITY FOR BANKING SYSTEMS STABILITY

Stefano Zedda (), Michele Patané and Luana Miggiano
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Stefano Zedda: University of Cagliari, Via S.Ignazio, 17 - 09123, Cagliari, Italy
Michele Patané: University of Siena, Italy
Luana Miggiano: University of Siena, Italy

Journal of Financial Management, Markets and Institutions (JFMMI), 2020, vol. 08, issue 02, 1-19

Abstract: In this paper, we analyzed the role of banks’ traditional lending on systemic stability. Firstly, we quantified the effect of correlation among banks’ results on systemic risk through Monte Carlo simulation. Secondly, we verified how traditional lending affects banks’ results correlation. Finally, combining the two effects, we assessed the importance of bank traditional lending on financial stability. Our results suggest that banks devoting a higher share of their assets to traditional lending show a lower correlation of their comprehensive income, thus having a mitigation effect on systemic stability.

Keywords: Banking; systemic risk; Monte Carlo simulation; correlation (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1142/S2282717X2050005X

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