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Back to the basics in banking ? A micro-analysis of banking system stability

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  • Olivier De Jonghe

    () (Ghent University
    National Bank of Belgium, Research Department)

Abstract

This paper analyzes the relationship between banks’ divergent strategies toward specialization and diversification of financial activities and their ability to withstand a banking sector crash. We first generate market-based measures of banks’ systemic risk exposures using extreme value analysis. Systemic banking risk is measured as the tail beta, which equals the probability of a sharp decline in a bank’s stock price conditional on a crash in a banking index. Subsequently, the impact of (the correlation between) interest income and the components of non-interest income on this risk measure is assessed. The heterogeneity in extreme bank risk is attributed to differences in the scope of non-traditional banking activities: non-interest generating activities increase banks’ tail beta. In addition, smaller banks and better-capitalized banks are better able to withstand extremely adverse conditions. These relationships are stronger during turbulent times compared to normal economic conditions. Overall, diversifying financial activities under one umbrella institution does not improve banking system stability, which may explain why financial conglomerates trade at a discount

Suggested Citation

  • Olivier De Jonghe, 2009. "Back to the basics in banking ? A micro-analysis of banking system stability," Working Paper Research 167, National Bank of Belgium.
  • Handle: RePEc:nbb:reswpp:200906-26
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    File URL: https://www.nbb.be/doc/oc/repec/reswpp/wp167en.pdf
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    Cited by:

    1. Wang, Chien-An & Shen, Chung-Hua, 2012. "Decoupling the distressed banks and their clients, and coupling the distressed firms and their lending banks," Pacific-Basin Finance Journal, Elsevier, vol. 20(3), pages 483-505.
    2. Enrico Perotti & Lev Ratnovski & Razvan Vlahu, 2011. "Capital Regulation and Tail Risk," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 123-163, December.
    3. Christian Calm¨¨s & Raymond Th¨¦oret, 2016. "The Asymmetric Impact of Portfolio Mix on Bank Performance over the Business Cycle: U.S. and Canadian Evidence," Review of Economics & Finance, Better Advances Press, Canada, vol. 6, pages 57-74, February.
    4. Derbali, Abdelkader & Hallara, Slaheddine, 2016. "Systemic risk of European financial institutions: Estimation and ranking by the Marginal Expected Shortfall," Research in International Business and Finance, Elsevier, vol. 37(C), pages 113-134.

    More about this item

    Keywords

    diversification; non-interest income; financial conglomerates; banking stability; extreme value analysis; tail risk;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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