Bank systemic risk and the business cycle: Canadian and U.S. evidence

Christian Calmès () and Raymond Théoret ()
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Raymond Théoret: Chaire d'information financière et organisationnelle ESG-UQAM, Université du Québec (Montréal), Université du Québec (Outaouais)

RePAd Working Paper Series from Département des sciences administratives, UQO

Abstract: This paper investigates how banks, as a group, react to macroeconomic risk and uncertainty, and more specifically the way banks systemic risk evolves over the business cycle. Adopting the methodology of Beaudry et al. (2001), our results clearly suggest that the dispersion across banks traditional portfolios has increased through time. We introduce an estimation procedure based on EGARCH and refine Baum et al. (2002, 2004, 2009) and Quagliariello (2007, 2009) framework to analyze the question in the new industry context, i.e. shadow banking. Consistent with finance theory, we first confirm that banks tend to behave homogeneously vis-à-vis macroeconomic uncertainty. In particular, we find that the cross-sectional dispersions of loans to assets and non-traditional activities shrink essentially during downturns, when the resilience of the banking system is at its lowest. More importantly, our results also suggest that the cross-sectional dispersion of market-oriented activities is both more volatile and sensitive to the business cycle than the dispersion of the traditional activities.

Keywords: Banking stability; Macroprudential policy; Herding; Macroeconomic uncertainty; Markov switching regime; EGARCH. (search for similar items in EconPapers)
JEL-codes: C32 G20 G21 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2012-04-27
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba, nep-mac and nep-rmg
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