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Bank resilience to systemic shocks and the stability of banking systems: Small is beautiful

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  • Vallascas, Francesco
  • Keasey, Kevin
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    Abstract

    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 31 (2012)
    Issue (Month): 6 ()
    Pages: 1745-1776

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    Handle: RePEc:eee:jimfin:v:31:y:2012:i:6:p:1745-1776

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    Web page: http://www.elsevier.com/locate/inca/30443

    Related research

    Keywords: Banking risk; Microprudential regulation; Macroprudential regulation; European banking;

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    Cited by:
    1. Sylwester Kozak, 2013. "Consolidation of the banking sector in Poland in 1989-2013 in comparison with the structural changes of the banking sector in the USA and the EU," National Bank of Poland Working Papers 166, National Bank of Poland, Economic Institute.
    2. Fiordelisi, Franco & Mare, Davide Salvatore, 2014. "Competition and financial stability in European cooperative banks," Journal of International Money and Finance, Elsevier, vol. 45(C), pages 1-16.

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