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Size, Risk, and Governance in European Banking$
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Jens Hagendorff, Kevin Keasey, and Francesco Vallascas

Print publication date: 2013

Print ISBN-13: 9780199694891

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199694891.001.0001

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The Determinants of European Bank Exposure to Systemic Shocks

The Determinants of European Bank Exposure to Systemic Shocks

Chapter:
(p.99) 5 The Determinants of European Bank Exposure to Systemic Shocks
Source:
Size, Risk, and Governance in European Banking
Author(s):

Jens Hagendorff

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780199694891.003.0005

The purpose of this chapter is to analyse whether a European banking system, which consists of smaller and more specialised banking firms and is regulated with a larger set of prudential rules than present, is likely to better withstand systemic shocks. The chapter adopts a novel empirical approach that relates the changes in the risk that a bank fails to changes in the degree of systemic stability. Also, the role of liquidity is examined in protecting banks against these shocks only when the banking system is under stress. While the results show that restrictions on a bank’s leverage ratio and the imposition of liquidity requirements, as in the Basel III Accord, may improve the resilience of a bank to systemic events, they also demonstrate that bank size, the share of non-interest income and asset growth (none of which are at the centre of the new regulatory landscape) are key determinants of a bank’s risk exposure. In particular, the introduction of a cap on bank absolute size appears the most effective tool, ceteris paribus, to reduce the default risk of a bank given systemic events.

Keywords:   Bank Size, Systemic Risk, Regulation, Basel Accord

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