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Shocks at large banks and banking sector distress: The Banking Granular Residual

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  • Blank, Sven
  • Buch, Claudia M.
  • Neugebauer, Katja

Abstract

Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix [Gabaix, X., 2008a. The Granular Origins of Aggregate Fluctuations. Available at SSRN: http://ssrn.com/abstract=1111765] and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2008). We find that positive shocks at large banks reduce the probability of distress of small banks.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Stability.

Volume (Year): 5 (2009)
Issue (Month): 4 (December)
Pages: 353-373

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Handle: RePEc:eee:finsta:v:5:y:2009:i:4:p:353-373

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Web page: http://www.elsevier.com/locate/jfstabil

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Keywords: Banking distress Size effects Shock propagation Granular Residual;

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  1. J.A. Bikker & K. Haaf, 2001. "Competition, Concentration and their Relationship: an EmpiricalAnalysis of the Banking Industry," DNB Staff Reports (discontinued) 68, Netherlands Central Bank.
  2. Xavier Gabaix, 2009. "Power Laws in Economics and Finance," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 255-294, 05.
  3. De Graeve, F. & Kick, T. & Koetter, M., 2008. "Monetary policy and financial (in)stability: An integrated micro-macro approach," Journal of Financial Stability, Elsevier, vol. 4(3), pages 205-231, September.
  4. Franklin Allen & Douglas Gale, 2004. "Competition and financial stability," Proceedings, Federal Reserve Bank of Cleveland, pages 453-486.
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  6. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  7. Koetter, Michael & Kick, Thomas, 2007. "Slippery slopes of stress: ordered failure events in German banking," Discussion Paper Series 2: Banking and Financial Studies 2007,03, Deutsche Bundesbank, Research Centre.
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Citations

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Cited by:
  1. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  2. Sven Blank & Jonas Dovern, 2010. "What macroeconomic shocks affect the German banking system?: Analysis in an integrated micro-macro model," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 2(2), pages 126-148, June.
  3. repec:diw:diwfin:diwfin is not listed on IDEAS
  4. Buch, Claudia M. & Neugebauer, Katja, 2011. "Bank-specific shocks and the real economy," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2179-2187, August.
  5. Franziska Bremus & Claudia M. Buch, 2013. "Granularity in Banking and Growth: Does Financial Openness Matter?," CESifo Working Paper Series 4356, CESifo Group Munich.
  6. Franziska Bremus & Claudia Buch & Katheryn Russ & Monika Schnitzer, 2013. "Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity," NBER Working Papers 19093, National Bureau of Economic Research, Inc.
  7. del Rosal, Ignacio, 2013. "The granular hypothesis in EU country exports," Economics Letters, Elsevier, vol. 120(3), pages 433-436.
  8. repec:diw:diwfin:diwfin02030 is not listed on IDEAS
  9. Francisco Vazquez & Benjamin M. Tabak & Marcos Souto, 2010. "A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector," Working Papers Series 226, Central Bank of Brazil, Research Department.

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