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Shocks at large banks and banking sector distress: the Banking Granular Residual

  • Blank, Sven
  • Buch, Claudia M.
  • Neugebauer, Katja

Size matters in banking. In this paper, we explore whether shocks originating at large banks affect the probability of distress of smaller banks and thus the stability of the banking system. Our analysis proceeds in two steps. In a first step, we follow Gabaix (2008a) and construct a measure of idiosyncratic shocks at large banks, the so-called Banking Granular Residual. This measure documents the importance of size effects for the German banking system. In a second step, we incorporate this measure of idiosyncratic shocks at large banks into an integrated stress-testing model for the German banking system following De Graeve et al. (2007). We find that positive shocks at large banks reduce the probability of distress of small banks.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 2: Banking and Financial Studies with number 2009,04.

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Date of creation: 2009
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Handle: RePEc:zbw:bubdp2:200904
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  1. Jacobson, Tor & Lindé, Jesper & Roszbach, Kasper, 2005. "Exploring Interactions between Real Activity and the Financial Stance," Working Paper Series 184, Sveriges Riksbank (Central Bank of Sweden).
  2. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
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