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Good for one, bad for all: Determinants of individual versus systemic risk

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  • López-Espinosa, Germán
  • Rubia, Antonio
  • Valderrama, Laura
  • Antón, Miguel

Abstract

We analyze a sample of large international banks in major advanced economies and examine the impact that bank-specific factors have on an institution's solvency risk and its contribution to systemic risk. We focus on the five categories that the Basel Committee on Banking Supervision has recently proposed as indicators of systemic importance. Our findings suggest that unstable funding is the main factor driving systemic risk. Furthermore, the combination of significant trading activities with global presence appears to exacerbate spillover risks to the global financial system. Interestingly, whereas trading activities contribute to the build-up of correlated or ‘wrong-way’ risk they help to mitigate individual solvency risk. Conversely, a decentralized approach to liquidity management seems to alleviate individual solvency risk but amplifies the transmission of financial distress across the financial system. This suggests that a macro-prudential approach to financial regulation should focus not only on scaling up micro-prudential measures but also on enabling the efficient transfer of risk between financial institutions.

Suggested Citation

  • López-Espinosa, Germán & Rubia, Antonio & Valderrama, Laura & Antón, Miguel, 2013. "Good for one, bad for all: Determinants of individual versus systemic risk," Journal of Financial Stability, Elsevier, vol. 9(3), pages 287-299.
    • Handle: RePEc:eee:finsta:v:9:y:2013:i:3:p:287-299
    DOI: 10.1016/j.jfs.2013.05.002
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    More about this item

    Keywords

    CoVaR; Correlated risks; Financial regulation; Individual risk; Systemic risk;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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