Bank resilience to systemic shocks and the stability of banking systems: Small is beautiful
By Francesco Vallascas, Kevin Keasey. 2012
128 citations recorded by the source corpus.
Utilising a novel empirical approach and an extensive sample of listed European banks, we identify which bank characteristics offer a shelter from systemic shocks and compare the relative effects of several hypothetical prudential rules on a bank’s risk exposure. While the results show that restrictions on a bank’s leverage ratio and the imposition of liquidity requirements, as in the Basel III Accord, may improve the resilience of a bank to systemic events, they also demonstrate that bank size, the share of non-interest income and asset growth (none of which are at the centre of the new regulatory landscape) are key determinants of a bank’s risk exposure. In particular, the introduction of a cap on bank absolute size appears the most effective tool, ceteris paribus, to reduce the default risk of a bank given systemic events. Furthermore, in spite of the integration process of the financial industry in Europe, the analysis presented here shows that such a cap should be country-specific with smaller economies requiring smaller banks. Finally, we show that the strengthening of individual bank stability obtained via size restrictions is accompanied by a reduction of the contribution to systemic risk for banks which are relatively large compared to the domestic economy.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/017baf7f06cc5753af067739b58e8e816f97e8e4
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Citations in the corpus
- Systemic Risk and Bank Size (2018, unknown): “…size is typically an important driver of systemic risk measures (see, for instance, De Jonghe, 2010; Hovakimian et al., 2012; Huang et al., 2012; Vallascas and Keasey, 2012; Zhang et al., 2015; Laeven et al., 2016; Sedunov, 2016), there is growing evidence that size may not be a persistent…”
- Competition and Financial Stability in European Cooperative Banks (2014, background): “Furthermore, size appears to be positively related to systemic risk (Vallascas and Keasey, 2012; De Jonghe, 2010) and the majority of cooperative banks are small rural credit institutions.”