Systemic risk and bank business models
In this study we disentangle two dimensions of banks’ systemic risk: the level of bank tail risk and the linkage between a bank’s tail risk and severe shocks in the financial system. We employ a measure of the systemic risk of financial institutions that can be decomposed into two subcomponents reflecting these dimensions. Empirically, we show quantitatively how bank characteristics are related to bank tail risk and systemic linkage. The interrelationship between bank characteristics and these dimensions determine the relation between bank characteristics and systemic risk. Certain characteristics that are irrelevant to the soundness of a financial institution taken in isolation turn out to be important for the level of systemic risk, and vice versa. Our analytical framework helps to evaluate differences in direction and scope of policy under the micro- and macro-prudential objectives of regulation.
Keywords: Financial institutions, financial stability, tail risk, macroprudential regulation, non-interest income.
JEL Classifications: G10, G21, G28.
Working paper no. 442
- Maarten van Oordt
- Chen Zhou