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Are banks too big to fail?

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  • Chen Zhou

Abstract

Abstract We consider three measures on the systemic importance of a financial institu- tion within a interconnected financial system. Based on the measures, we study the relation between the size of a financial institution and its systemic importance. From both theo- retical model and empirical analysis, we find that in analyzing the systemic risk posed by one financial institution to the system, size should not be considered as a proxy of systemic importance. In other words, the "too big to fail" argument is not always valid, and alter- native measures on systemic importance should be considered. We provide the estimation methodology of systemic importance measures under the multivariate Extreme Value Theory (EVT) framework.

Suggested Citation

  • Chen Zhou, 2009. "Are banks too big to fail?," DNB Working Papers 232, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:232
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    Citations

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    Cited by:

    1. Katja Neugebauer, 2010. "Schock├╝bertragung und Drittlandeffekte auf internationalen Bankenm├Ąrkten," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 79(4), pages 59-74.
    2. Toni Gravelle & Fuchun Li, 2011. "Measuring Systemic Importance of Financial Institutions: An Extreme Value Theory Approach," Staff Working Papers 11-19, Bank of Canada.
    3. Stefano Gurciullo, 2014. "Stess-testing the system: Financial shock contagion in the realm of uncertainty," Papers 1412.1679, arXiv.org.
    4. Castro, Carlos & Ferrari, Stijn, 2014. "Measuring and testing for the systemically important financial institutions," Journal of Empirical Finance, Elsevier, vol. 25(C), pages 1-14.
    5. Nikolaus Hautsch & Julia Schaumburg & Melanie Schienle, 2015. "Financial Network Systemic Risk Contributions," Review of Finance, European Finance Association, vol. 19(2), pages 685-738.
    6. Kersten Kellermann, 2011. "Too big to fail: a thorn in the side of free markets," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 38(3), pages 331-349, July.
    7. Calluzzo, Paul & Dong, Gang Nathan, 2015. "Has the financial system become safer after the crisis? The changing nature of financial institution risk," Journal of Banking & Finance, Elsevier, vol. 53(C), pages 233-248.
    8. Georg Mainik & Eric Schaanning, 2012. "On dependence consistency of CoVaR and some other systemic risk measures," Papers 1207.3464, arXiv.org, revised Aug 2012.
    9. Christian Weistroffer, 2011. "Identifying Systemically Important Financial Institutions (SIFIs)," Working Papers id:4383, eSocialSciences.
    10. Carlos Castro Iragorri & Stijn Ferrari, 2010. "Measuring the systemic importance of financial institutions using market information," Financial Stability Review, National Bank of Belgium, vol. 8(1), pages 127-141, June.
    11. Kyle Moore & Chen Zhou, 2012. "Identifying systemically important financial institutions: size and other determinants," DNB Working Papers 347, Netherlands Central Bank, Research Department.
    12. Garita, Gus, 2010. "An Inquiry into Banking Portfolios and Financial Stability Surrounding "The Great Recession"," MPRA Paper 25996, University Library of Munich, Germany.
    13. Moore, Kyle & Zhou, Chen, 2014. "The determinants of systemic importance," LSE Research Online Documents on Economics 59289, London School of Economics and Political Science, LSE Library.
    14. Zhou, Chen, 2013. "The impact of imposing capital requirements on systemic risk," Journal of Financial Stability, Elsevier, vol. 9(3), pages 320-329.

    More about this item

    Keywords

    Too big to fail; systemic risk; systemic importance; multivariate extreme value theory.;

    JEL classification:

    • F3 - International Economics - - International Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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