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

Author Info

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

Abstract

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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Keywords: Banking sector distress; size effects; shock propagation; Granular Residual;

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Find related papers by JEL classification:
  • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
  • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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  1. J.A. Bikker & K. Haaf, 2000. "Competition, concentration and their relationship: an empirical analysis of the banking industry," Research Series Supervision (discontinued) 30, Netherlands Central Bank, Directorate Supervision.
  2. Xavier Gabaix, 2008. "Power Laws in Economics and Finance," NBER Working Papers 14299, National Bureau of Economic Research, Inc.
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  4. Kick, Thomas & Koetter, Michael, 2007. "Slippery slopes of stress: Ordered failure events in German banking," Journal of Financial Stability, Elsevier, vol. 3(2), pages 132-148, July.
  5. Eric Santor, 2003. "Banking Crises and Contagion: Empirical Evidence," Staff Working Papers 03-1, Bank of Canada.
  6. Helmut Elsinger & Alfred Lehar & Martin Summer, 2006. "Risk Assessment for Banking Systems," Management Science, INFORMS, vol. 52(9), pages 1301-1314, September.
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  8. Christian Upper & Andreas Worms, 2001. "Estimating bilateral exposures in the German interbank market: is there a danger of contagion?," BIS Papers chapters, in: Bank for International Settlements (ed.), Marrying the macro- and micro-prudential dimensions of financial stability, volume 1, pages 211-229 Bank for International Settlements.
  9. Allen, Franklin & Gale, Douglas, 2004. "Competition and Financial Stability," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 453-80, June.
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  11. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  12. De Graeve, F. & Kick, T. & Koetter, M., 2008. "Monetary policy and financial (in)stability: An integrated micro-macro approach," Journal of Financial Stability, Elsevier, vol. 4(3), pages 205-231, September.
  13. Hans Degryse & Grégory Nguyen, 2007. "Interbank Exposures: An Empirical Examination of Contagion Risk in the Belgian Banking System," International Journal of Central Banking, International Journal of Central Banking, vol. 3(2), pages 123-171, June.
  14. Uhlig, Harald, 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," CEPR Discussion Papers 2137, C.E.P.R. Discussion Papers.
  15. Guillermo A. Calvo & Enrique G. Mendoza, 1997. "Rational herd behavior and the globalization of securities markets," Discussion Paper / Institute for Empirical Macroeconomics 120, Federal Reserve Bank of Minneapolis.
  16. Harold A. Black & M. Cary Collins & Breck L. Robinson & Robert L. Schweitzer, 1997. "Changes In Market Perception Of Riskiness: The Case Of Too-Big-To-Fail," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 389-406, 09.
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  18. Pushkin, Dmitri O & Aref, Hassan, 2004. "Bank mergers as scale-free coagulation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 336(3), pages 571-584.
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Cited by:

  1. Blank, Sven & Dovern, Jonas, 2009. "What macroeconomic shocks affect the German banking system? Analysis in an integrated micro-macro model," Discussion Paper Series 2: Banking and Financial Studies 2009,15, Deutsche Bundesbank, Research Centre.
  2. Xavier Gabaix, 2009. "The Granular Origins of Aggregate Fluctuations," NBER Working Papers 15286, National Bureau of Economic Research, Inc.
  3. F. Bremus & Claudia M. Buch, 2013. "Granularity in Banking and Growth: Does Financial Openness Matter?," IWH Discussion Papers 14, Halle Institute for Economic Research.
  4. Bremus, Franziska & Buch, Claudia M., 2013. "Granularity in Banking and Growth: Does Financial Openness Matter?," IWH Discussion Papers 14/2013, Halle Institute for Economic Research (IWH).
  5. Bremus, Franziska & Buch, Claudia M. & Russ, Katheryn N. & Schnitzer, Monika, 2013. "Big Banks and Macroeconomic Outcomes: Theory and Cross-Country Evidence of Granularity," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80048, Verein für Socialpolitik / German Economic Association.
  6. Itzhak Ben-David & Francesco Franzoni & Rabih Moussawi & John Sedunov, 2016. "The Granular Nature of Large Institutional Investors," NBER Working Papers 22247, National Bureau of Economic Research, Inc.
  7. repec:diw:diwfin:diwfin02030 is not listed on IDEAS
  8. Francisco Vazquez & Benjamin M. Tabak & Marcos Souto, 2010. "A Macro Stress Test Model of Credit Risk for the Brazilian Banking Sector," Working Papers Series 226, Central Bank of Brazil, Research Department.
  9. Buch, Claudia M. & Neugebauer, Katja, 2011. "Bank-specific shocks and the real economy," Journal of Banking & Finance, Elsevier, vol. 35(8), pages 2179-2187, August.
  10. repec:diw:diwfin:diwfin is not listed on IDEAS
  11. repec:zbw:iwhdps:14-13 is not listed on IDEAS
  12. del Rosal, Ignacio, 2013. "The granular hypothesis in EU country exports," Economics Letters, Elsevier, vol. 120(3), pages 433-436.

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