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Empirical Evidence on "Systemic as a Herd": The Case of Japanese Regional Banks

Author

Listed:
  • Naohisa Hirakata

    (Bank of Japan)

  • Yosuke Kido

    (Bank of Japan)

  • Jie Liang Thum

    (Monetary Authority of Singapore)

Abstract

We examine a sample of Japanese regional banks and explore whether exposure to market risk factors affects systemic risk through a banks' portfolio composition or revenue source, using Adrian and Brunnermeier's (2016) CoVaR to proxy for systemic risk. We find evidence of "systemic as a herd" behavior among Japanese regional banks, as portfolio and revenue components associated with market activities exert positive and significant impacts on systemic risk by generating higher comovement among banks, even though they reduce standalone bank risk through portfolio diversification. Further, the marginal effect of an increase in a given banks' market-related components on systemic risk is larger when the share of the corresponding components is already high among other banks. Our results have important implications from the macro-prudential perspective.

Suggested Citation

  • Naohisa Hirakata & Yosuke Kido & Jie Liang Thum, 2017. "Empirical Evidence on "Systemic as a Herd": The Case of Japanese Regional Banks," Bank of Japan Working Paper Series 17-E-1, Bank of Japan.
    • Handle: RePEc:boj:bojwps:wp17e01
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    References listed on IDEAS

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    Cited by:

    1. Hirata, Wataru & Ojima, Mayumi, 2020. "Competition and bank systemic risk: New evidence from Japan's regional banking," Pacific-Basin Finance Journal, Elsevier, vol. 60(C).

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    More about this item

    Keywords

    Systemic risk; Herd behavior; Market risk factors; CoVaR;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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