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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. Lelyveld, Iman van & Liedorp, Franka, 2006. "Interbank Contagion in the Dutch Banking Sector: A Sensitivity Analysis," MPRA Paper 806, University Library of Munich, Germany.
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  4. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
  5. Jacobson, Tor & Linde, Jesper & Roszbach, Kasper, 2005. "Exploring interactions between real activity and the financial stance," Journal of Financial Stability, Elsevier, vol. 1(3), pages 308-341, April.
  6. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  7. Degryse, H.A. & Nguyen, G., 2006. "Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System," Discussion Paper 2006-016, Tilburg University, Tilburg Law and Economic Center.
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  18. Pushkin, Dmitri O & Aref, Hassan, 2004. "Bank mergers as scale-free coagulation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 336(3), pages 571-584.
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Citations

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Cited by:
  1. F. Bremus & Claudia M. Buch, 2013. "Granularity in Banking and Growth: Does Financial Openness Matter?," IWH Discussion Papers 14, Halle Institute for Economic Research.
  2. Xavier Gabaix, 2005. "The Granular Origins of Aggregate Fluctuations," 2005 Meeting Papers 470, Society for Economic Dynamics.
  3. repec:diw:diwfin:diwfin is not listed on IDEAS
  4. 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.
  5. 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.
  6. 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.
  7. del Rosal, Ignacio, 2013. "The granular hypothesis in EU country exports," Economics Letters, Elsevier, vol. 120(3), pages 433-436.
  8. 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.
  9. repec:diw:diwfin:diwfin02030 is not listed on IDEAS

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