Traditional commercial banking and systemic risk: Evidence from Hungary

Abstract

Systemic risk reduction in banking is a key component in maintaining financial stability. Even after extensive explorations, the role of nontraditional activites in systemic risk still offers several questions to study. The paper aims to contribute to the literature on the topic by empirically examining whether traditional and nontraditional banking activities differ in terms of systemic risk. To answer this question, traditional commercial banking is assumed to be represented by the loan-deposit interest margin income component. Hungarian banking sector data between 2003 and 2020 are analyzed with principal component analysis and multidimensional scaling. The primary measure in systemic risk quantification is the return covariance-based absorption ratio. Empirical findings suggest that, when compared to a more diverse range of banking activities, traditional commercial banking may be characterized by lower systemic risk. Although in these two cases the most influential components of systemic risk may be considered as similar, the other components exhibit significant differences.