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Regional bank failures and volatility transmission

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  • Lastrapes, William D.
  • Wiesen, Thomas F.P.

Abstract

We estimate the effect of the spring 2023 failures of Silicon Valley Bank and Signature Bank on the “connectedness” of US bank stock return volatilities using the forecast error variance decomposition framework of Diebold and Yilmaz (2012, 2014) and Lastrapes and Wiesen (2021). Using split-sample and time-varying VAR methods, we find that those failures significantly increased spillovers across a sample of surviving regional banks, but had only small and temporary effects on spillovers across systemically important too-big-to-fail banks. Our main findings imply that regulatory policy toward systemically important banks has been credible but that additional oversight of regional banks should be considered.

Suggested Citation

  • Lastrapes, William D. & Wiesen, Thomas F.P., 2025. "Regional bank failures and volatility transmission," Journal of Financial Stability, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finsta:v:78:y:2025:i:c:s1572308925000336
    DOI: 10.1016/j.jfs.2025.101404
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    More about this item

    Keywords

    Connectedness; Spillovers; Forecast error variance decomposition; Market integration; Bank runs; Banking; VAR;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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