Factors driving systemic risk of banks in Latin America

We investigate the drivers of systemic risk and contagion among banks in the Latin American financial sector. First, a systemic risk measure analysing tail co-movements of daily stock returns of all Latin American banks is derived. We then run panel regressions for our systemic risk measure using idiosyncratic bank characteristics and macroeconomic control variables. Our results include various significant drivers of systemic importance of banks in Latin America like bank size, market concentration and high government indebtedness. Interestingly, we empirically prove that during the financial/economic crisis (2006–2011) systemic risk was driven by banks with low earning prospects and relatively sound deposit management whereas poor capital regulation drove systemic risk of banks during the stable periods before (2003–2005) and after the crisis (2012–2014).