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Carrying the (paper) burden: A portfolio view of systemic risk and optimal bank size

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Listed:
  • Bos J.W.B.
  • Lamers M.A.J.
  • Purice V.

    (GSBE)

Abstract

We examine the relationship between bank size and financial stability by viewing the supervisor of a banking system as an investor holding a portfolio of banks. Based on this view, we investigate the role of large banks in determining the systemic risk in this portfolio. Our results, based on book data of U.S. banks and Bank Holding Companies, indicate that the largest banks are consistently overrepresented in the current portfolio compared with the minimum variance portfolio. Moreover, the risk level of the portfolio can be reduced by limiting concentration without sacrificing returns.

Suggested Citation

  • Bos J.W.B. & Lamers M.A.J. & Purice V., 2014. "Carrying the (paper) burden: A portfolio view of systemic risk and optimal bank size," Research Memorandum 014, Maastricht University, Graduate School of Business and Economics (GSBE).
  • Handle: RePEc:unm:umagsb:2014014
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    File URL: https://cris.maastrichtuniversity.nl/portal/files/1550963/content
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    References listed on IDEAS

    as
    1. Ledoit, Olivier & Wolf, Michael, 2003. "Improved estimation of the covariance matrix of stock returns with an application to portfolio selection," Journal of Empirical Finance, Elsevier, vol. 10(5), pages 603-621, December.
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    Keywords

    Optimization Techniques; Programming Models; Dynamic Analysis; Financial Markets and the Macroeconomy; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy; Banks; Depository Institutions; Micro Finance Institutions; Mortgages;

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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