To read this content please select one of the options below:

Determinants of systemically important banks: the case of Europe

Jacob Kleinow (Department of Finance, Freiberg University, Freiberg, Germany)
Tobias Nell (Department of Accounting, Freiberg University, Freiberg, Germany)

Journal of Financial Economic Policy

ISSN: 1757-6385

Article publication date: 2 November 2015

971

Abstract

Purpose

This paper aims to investigate the drivers of systemic risk and contagion among European banks from 2007 to 2012. The authors explain why some banks are expected to contribute more to systemic events in the European financial system than others by analysing the tail co-movement of banks’ security prices.

Design/methodology/approach

First, the authors derive a systemic risk measure from the concepts of marginal expected shortfall and conditional value at risk analysing tail co-movements of daily bank stock returns. The authors then run panel regressions for the systemic risk measure using idiosyncratic bank characteristics and a set of country and policy control variables.

Findings

The results comprise highly significant drivers of systemic risk in the European banking sector with important implications for research and banking regulation. Using a set of panel regressions, the authors identify bank size, asset and income structure, loss and liquidity coverage, profitability and several macroeconomic conditions as drivers of systemic risk.

Research limitations/implications

Analysing the tail co-movement of security prices excludes a number of “smaller” institutions without publicly listed securities. The other shortfall is that we do not assess the systemic impact of non-bank financial institutions.

Practical implications

Regulators have to consider a broad variety of indicators for assessing systemic risks. Existing microprudential-oriented rules are less effective, and policymakers may consider new measures like asset diversification to mitigate systemic risks in the banking system.

Originality/value

The authors contribute to existing empirical analyses in three ways. First, they propose a method to identify systemically important banks (SIBs). Second, they develop two measures to assess their potential negative impact on the system. Third, they contribute to the closing of the research gaps by analysing which macroprudential regulations for SIBs are most effective without hampering free market forces.

Keywords

Acknowledgements

This paper was presented at the 2015 Midwest Finance Association Annual Meeting, 2015 Southwestern Finance Association Annual Meeting, 2015 Eastern Finance Association Annual Meeting. The authors thank Silvia Rogler, Andreas Horsch and the reviewer for their useful remarks.

Citation

Kleinow, J. and Nell, T. (2015), "Determinants of systemically important banks: the case of Europe", Journal of Financial Economic Policy, Vol. 7 No. 4, pp. 446-476. https://doi.org/10.1108/JFEP-07-2015-0042

Publisher

:

Emerald Group Publishing Limited

Copyright © 2015, Emerald Group Publishing Limited

Related articles