Systemic and Failure Risk Effects of the U.S. Regional Bank Crisis

Since the outbreak of the global financial crisis, forestalling and defusing systemic financial risks has been a hot topic of social concerns. In China, with constant development and innovation of the financial system, higher level financial deepening and openness, and economic downside pressure under new normal” economy, risk-prevention becomes much more complicated. In this case, the financial system should better serve the real economy, reduce financial risks and deepen financial reforms—three tasks of China’s financial work. The report of the 19th National Congress of the Communist Party of China further emphasized that the government should improve the financial regulatory system to forestall systemic financial risks. Therefore, ensuring China’s financial stability and preventing systemic risks have become the priority and major challenges for China’s financial regulatory authorities. Accurate measurement of systemic risks is the basis for risk prevention, the improvement of financial regulations, and any effective regulatory actions. However, existing domestic studies measure financial institutions’ systemic risks from only one aspect—systemic risk contribution or systemic risk exposure, and lack a clear distinction between the two measures in theoretical and policy implications. Some scholars even use systemic risk exposure metrics to measure the systemic risk contribution of financial institutions and assess its systemic importance. Actually, the aggregate risks of financial institutions include both risk contribution and risk exposure—the former focuses on systemic importance while the latter underlines systemic vulnerability, so we should take both sides into risk measurement. This paper uses ΔCoVaR and Exposure-ΔCoVaR to comprehensively measure the systemic risks of financial institutions from both sides—systemic importance and systemic vulnerability. This paper finds no significant correlation between the systemic importance and vulnerability of financial institutions in the cross-sectional dimension, but significant correlation in the time-series dimension, which means the systemic importance and vulnerability of financial institutions change simultaneously and periodically. The results imply that, in China, the systemic importance of bank and insurance industry exceed that of securities industry, while the latter’s systemic vulnerability exceeds that of the former. These differences exist persistently in the time-series dimension. The big four” banks have high systemic importance but low systemic vulnerability, while a handful of financial institutions have both significantly high systemic importance and vulnerability. Furthermore, the size of financial institutions’ asset is an important influencing factor of systemic importance, and the leverage is an important influencing factor of systemic vulnerability, while the margin trading of securities has a significant positive effect on systemic vulnerability but no significant effect on systemic importance. This paper accurately measures the systemic risks of 33 listed financial institutions in China from two aspects—risk contribution and risk exposure, and makes a precise assessment on their systemic importance and vulnerability. We also investigate the influencing factors of financial institutions’ systemic importance and vulnerability. These findings help to understand the systemic risks of China’s financial institutions in cross-sectional and time-series dimensions and correct some wrong perceptions in existing academic studies, and further provide useful empirical references and policy suggestions to China’s financial regulatory authorities to forestall systemic risks and improve macro-regulation. The policy implications of the results are mainly reflected in the following three aspects. First, regulators need to select targeted regulatory objectives and policy tools to make differential regulations based on the features of institutions in systemic importance and vulnerability. Second, different institutions are different in systemic importance and vulnerability, so regulatory authorities should pick out key financial institutions through their performance in systemic importance and vulnerability, and enhance the supervision of key institutions. Third, financial regulators are able to choose proper and effective regulatory tools according to the main drivers of systemic importance and vulnerability.

Systemic risk, macro-prudential regulation and organizational diversity in banking

This paper examines the impact of monetary policy and capital regulation on commercial banks' systemic risk using a fixed panel model with data from 16 listed commercial banks in China from Q1 2011 to Q4 2019. The results show that both quantity-based monetary policy instruments, represented by currency issuance, and price-based monetary policy instruments, represented by interest rates, affect systemic risk. And they both show that accommodative monetary policies amplify commercial banks systemic risk. Besides, capital regulation has a dampening effect on systemic risk, and the intensity of regulation moves inversely with systemic risk. In addition, there is a synergistic effect between monetary policy and capital regulation. Furthermore, a symbiotic relationship exists between monetary policy and capital regulation. The findings of this study assist nations in managing systemic financial risks through macroeconomic policies.

Measuring bank downside systemic risk in Taiwan

At present, the measurement of systemic risk is still a worldwide challenge. The complex network theory provides a new perspective for the study of this problem. Based on the correlation coefficient between the banks calculated using their default probabilities, this paper builds China's banking networks for the periods of 2008-2019, and analyzes systematically the topological structure of the networks, and determine the size of the systemic risk from the perspective of network topology by using the corresponding characteristics of complex network with the feature of systemic financial risk. It is found that the systemic risk of China's banking industry has a declined tendency before 2018, and the main cause is due to the eigenvector centrality and clustering coefficient declined rapidly. However, after 2018, systemic risk showed a litter upward trend, and the increase of clustering coefficient and eigenvector centrality was the main reason for that upward trend. Before 2018, risk transmission was mainly taken place from local banks and joint-equity commercial banks to state-owned banks, which were the main risk bearers. After 2018, risk contagion mainly occurred among local banks, and some local banks role as systemically important ones. Therefore, dissolving the systemic financial risk in China should strengthen the regulation of local banks. In particular, the high-risk leverage operations and excessively innovative business should be strictly supervised so as to prevent the expansion and spread of the negative effects stemmed from maturity mismatch, maturity transformation and credit transformation.

When regulating banks based on their contribution to the overall risk of the banking system we have to consider that the risk of the banking system as well as each bank's risk contribution changes once bank equity capital gets reallocated. We define macroprudential capital requirements as the fixed point at which each bank's capital requirement equals its contribution to the risk of the system under the proposed capital requirements. This study uses two alternative models, a network based framework and a Merton model, to measure systemic risk and how it changes with bank capital and allocates risk to individual banks based on five risk allocation mechanisms used in the literature. Using a sample of Canadian banks we find that macroprudential capital allocations can differ by as much as 70% from observed capital levels, are not trivially related to bank size or individual bank default probability, increase in interbank assets, and differ substantially from a simple risk attribution analysis. We further find that across both models and all risk allocation mechanisms that macroprudential capital requirements reduce the default probabilities of individual banks as well as the probability of a systemic crisis by about 25%. Macroprudential capital requirements are robust to model risk and are positively correlated to future capital raised by banks as well as future losses in equity value. Our results suggest that financial stability can be substantially enhanced by implementing a systemic perspective on bank regulation.

Using data for banks from 65 countries for the period 2001–2013, we investigate the impact of bank regulation and supervision on individual banks’ systemic risk. Our cross-country empirical findings show that bank activity restriction, initial capital stringency and prompt corrective action are all positively related to systemic risk, measured by Marginal Expected Shortfall. We use the staggered timing of the implementation of Basel II regulation across countries as an exogenous event and use latitude for instrumental variable analysis to alleviate the endogeneity concern. Our results also hold for various robustness tests. We further find that the level of equity banks can alleviate such effect, while bank size is likely to enhance the effect, supporting our conjecture that the impact of bank regulation and supervision on systemic risk is through bank’s capital shortfall. Our results do not argue against bank regulation, but rather focus on the design and implementation of regulation.

By empirically analysing the panel data of Chinese commercial banks, we find that regional city commercial banks significantly mimic their peers in multiple lending parts of loan portfolio, while large nationwide commercial banks behave oppositely to their peers. In addition, by using a Euclidean distance way to measure bank interconnectedness, we reveal that the overlap of loan portfolios between banks is significantly correlated to the similarity of insolvency risk between them. It implies that peer effects of bank loan portfolio are likely to be sources of systemic insolvency risk in the bank system. These results help deepen the understanding of peer effects of bank activities, and provide insights into the correlation between peer effects and systemic risk in banks.

PurposeThe purpose of this paper is to investigate the effects of audit client importance on future bank risk and systemic risk in US-listed commercial banks.Design/methodology/approachThe authors use archival research method.FindingsThe authors mainly find that client importance is negatively related with future bank-specific crash risk and distress risk, and also with sector-wide systemic crash risk and systemic distress risk in the future. The authors also report some evidence that these relations become more pronounced during the crisis period than during the non-crisis period. Moreover, the effect of client importance on systemic risk is found to strengthen in banks audited by Big-N auditors, by auditors without clients who restate earnings, and by auditors with more industry expertise.Research limitations/implicationsThese findings contribute to the auditing and systemic risk literature.Practical implicationsThis study has implications for regulating the banking industry.Originality/valueThis study provides original evidence on how client importance affects bank-specific risk and systemic risk of the banking industry.

An empirical investigation of the existence of market discipline of off-balance sheet banking risk

Abnormal loan growth, credit information sharing and systemic risk in Asian banks

Macroprudential policy and bank systemic risk

This paper investigates the effectiveness of macroprudential policy to contain the systemic risk of European banks between 2000 and 2017. We use a new database (MaPPED) collected by experts at the ECB and national central banks with narrative information on a broad range of instruments which are tracked over their life cycle. Using a dynamic panel framework at a monthly frequency enables us to assess the impact of macroprudential tools and their design on the banks' systemic risk both in the short and the long run. We furthermore decompose the systemic risk measure in an individual bank risk component and a systemic linkage component. This is of particular interest because microprudential policy focuses on the tail risk of an individual bank while macroprudential policy targets systemic risk by addressing the interlinkages and common exposures across banks. On average, all banks benefit from macroprudential tools in terms of their individual risk. We find that credit growth tools and exposure limits exhibit the most pronounced downward effect on the individual risk component. However, we find evidence for a risk-shifting effect which is more pronounced for retail-oriented banks. The effects are heterogeneous across banks with respect to the systemic linkage component. Liquidity tools and measures aimed at increasing the resilience of banks decrease the systemic linkage of banks. However, these tools appear to be most effective for distressed banks. Our results have implications for the optimal design of macroprudential instruments.

We employ a unique hand-collected dataset and a novel methodology to examine systemic risk before and after the largest U.S. banking crisis of the 20th century. Our systemic risk measure captures both the credit risk of an individual bank as well as a bank’s position in the network. We construct linkages between all U.S. commercial banks in 1929 and 1934 so that we can measure how predisposed the entire network was to risk, where risk was concentrated, and how the failure of more than 9,000 banks during the Great Depression altered risk in the network. We find that the pyramid structure of the commercial banking system (i.e., the network’s topology) created more inherent fragility, but systemic risk was nevertheless fairly dispersed throughout banks in 1929, with the top 20 banks contributing roughly 18% of total systemic risk. The massive banking crisis that occurred between 1930{33 raised systemic risk per bank by 33% and increased the riskiness of the very largest banks in the system. We use Bayesian methods to demonstrate that when network measures, such as eigenvector centrality and a bank’s systemic risk contribution, are combined with balance sheet data capturing ex ante bank default risk, they strongly predict bank survivorship in 1934.

Microsystemic Regulation: A Perspective on Latin America and the Caribbean