Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-15T11:46:40.833Z Has data issue: false hasContentIssue false
  • English
  • Français

When Banks Grow Too Big for Their National Economies: Tail Risks, Risk Channels, and Government Guarantees

Published online by Cambridge University Press:  22 August 2018

Jens Hagendorff ,
Kevin Keasey  and
Francesco Vallascas
Get access Rights & Permissions [Opens in a new window]

Abstract

Banks are growing ever larger compared to their national economies. We show that increases in relative bank size (measured as a bank’s liabilities divided by national GDP) are linked to banks displaying higher tail risk. This effect is not entirely due to risk channels that disproportionately expose relatively large banks to systematic tail risks, sovereign risks, or banking crises. Instead, we detect a persistent component in the tail risk of relatively large banks that is bank-specific and connected to government guarantees. Furthermore, as banks grow in relative size, tail risks are shifted to debtholders without wealth gains for shareholders.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 5 , October 2018 , pp. 2041 - 2066
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

We are grateful to Paul Malatesta (the editor) and an anonymous reviewer for very helpful suggestions and comments. We thank Allen Berger, Lamont Black, Jaap Bos, Christa Bouwman, Bob DeYoung, Andrea Gamba, Kristopher Gerardi, Paul Glasserman, Simon Johnson (discussant), Stefanie Kleinmeier, Neslihan Ozkan (discussant), Thomas Post, Klaus Schaeck, Stefan Straetmans, Chris Veld, Yulia Veld-Merkoulova (discussant), participants at the 2012 Bank Research Conference at the FDIC, and seminar participants at the University of Bristol, the University of Glasgow, and Maastricht University for helpful suggestions. All remaining errors are our own. A previous version of this paper is titled “Systemic Size, Bank Risk and Systemic Crises.”

References

Acharya, V. V.; Drechsler, I.; and Schnabl, P.. “A Pyrrhic Victory? Bank Bailouts and Sovereign Credit Risk.” Journal of Finance, 69 (2014a), 2689–2739.Google Scholar
Acharya, V. V.; Engle, R.; and Pierret, D.. “Testing Macroprudential Stress Tests: The Risk of Regulatory Risk Weights.” Journal of Monetary Economics, 65 (2014b), 36–53.Google Scholar
Acharya, V. V.; Pedersen, L.; Philippon, T.; and Richardson, M.. “Measuring Systemic Risk.” Review of Financial Studies, 30 (2017), 2–47.Google Scholar
Acharya, V. V., and Steffen, S.. “The ‘Greatest’ Carry Trade Ever? Understanding Eurozone Bank Risks.” Journal of Financial Economics, 115 (2015), 215–236.Google Scholar
Beck, T.; De Jonghe, O.; and Schepens, G.. “Bank Competition and Stability: Cross-Country Heterogeneity.” Journal of Financial Intermediation, 22 (2013), 218–244.Google Scholar
Beltratti, A., and Stulz, R.. “Why Did Some Banks Perform Better during the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation.” Journal of Financial Economics, 105 (2012), 1–17.Google Scholar
Benston, G. J.; Hunter, W. C.; and Wall, L. D.. “Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earning Diversification.” Journal of Money, Credit, and Banking, 27 (1995), 777–788.Google Scholar
Bertay, A. C.; Demirgüç-Kunt, A.; and Huizinga, H.. “Do We Need Big Banks? Evidence on Performance, Strategy and Market Discipline.” Journal of Financial Intermediation, 22 (2013), 532–558.Google Scholar
Blum, J. M.“Why Basel II May Need a Leverage Ratio Restriction.” Journal of Banking and Finance, 32 (2008), 1699–1707.Google Scholar
Boyd, J. H., and Runkle, D. E.. “Size and Performance of Banking Firms: Testing the Predictions of Theory.” Journal of Monetary Economics, 31 (1993), 47–67.Google Scholar
Brown, C., and Dinç, S.. “Too Many to Fail? Evidence of Regulatory Forbearance When the Banking Sector Is Weak.” Review of Financial Studies, 24 (2011), 1378–1405.Google Scholar
Brunnermeier, M. K.; Dong, G.; and Palia, D.. “Banks’ Non-Interest Income and Systemic Risk.” Working Paper, Princeton University (2012).Google Scholar
Chava, S.; Ganduri, R.; and Yerramilli, V.. “Do Bond Investors Price Tail Risk Exposures of Financial Institutions?” Working Paper, University of Houston (2014).Google Scholar
Correa, R.; Lee, K.; Sapriza, H.; and Suarez, G. A.. “Sovereign Credit Risk, Banks’ Government Support, and Bank Stock Returns around the World.” Journal of Money, Credit and Banking, 46 (2014), 93–121.Google Scholar
De Jonghe, O.; Diepstraten, M.; and Schepens, G.. “Banks’ Size, Scope and Systemic Risk: What Role for Conflicts of Interest?” Journal of Banking and Finance, 61 (2015), 3–13.Google Scholar
Demirgüç-Kunt, A., and Huizinga, H.. “Are Banks Too Big to Fail or Too Big to Save? International Evidence from Equity Prices and CDS Spreads.” Journal of Banking and Finance, 37 (2013), 875–894.Google Scholar
Fahlenbrach, R.; Prilmeier, R.; and Stulz, R.. “This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis.” Journal of Finance, 67 (2012), 2139–2185.Google Scholar
Fahlenbrach, R., and Stulz, R.. “Bank CEO Incentives and the Credit Crisis.” Journal of Financial Economics, 99 (2011), 11–26.Google Scholar
Faleye, O.; Kovacs, T.; and Venkateswaran, A.. “Do Better-Connected CEOs Innovate More?” Journal of Financial and Quantitative Analysis, 49 (2014), 1201–1225.Google Scholar
Gandhi, P., and Lustig, H.. “Size Anomalies in U.S. Bank Returns.” Journal of Finance, 70 (2015), 733–768.Google Scholar
Gennaioli, N.; Martin, A.; and Rossi, S.. “Banks, Government Bonds, and Default: What Do the Data Say?” Working Paper, Bocconi University (2016).Google Scholar
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Neglected Risks, Financial Innovation, and Financial Fragility.” Journal of Financial Economics, 104 (2012), 452–468.Google Scholar
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Finance and the Preservation of Wealth.” Quarterly Journal of Economics, 129 (2014), 1221–1254.Google Scholar
Greenwood, R, and Scharfstein, D.. “The Growth of Finance.” Journal of Economic Perspectives, 27 (2013), 3–28.Google Scholar
Hovakimian, A., and Kane, E. J.. “Effectiveness of Capital Regulation at U.S. Commercial Banks, 1985 to 1994.” Journal of Finance, 55 (2000), 451–468.Google Scholar
Jensen, M. C., and Meckling, W. H.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.Google Scholar
Laeven, L., and Valencia, F.. “Systemic Banking Crises Database.” IMF Economic Review, 61 (2013), 225–270.Google Scholar
Penas, M. F., and Unal, H.. “Gains in Bank Mergers: Evidence from the Bond Markets.” Journal of Financial Economics, 74 (2004), 149–179.Google Scholar
Philippon, T.“Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.” American Economic Review, 105 (2015), 1408–1438.Google Scholar
Philippon, T., and Reshef, A.. “An International Look at the Growth of Modern Finance.” Journal of Economic Perspectives, 27 (2013), 73–96.Google Scholar
Ronn, E. I., and Verma, A. K.. “Pricing Risk-Adjusted Deposit Insurance: An Option-Based Model.” Journal of Finance, 41 (1986), 871–896.Google Scholar
Vallascas, F., and Hagendorff, J.. “The Risk Sensitivity of Capital Requirements: Evidence from an International Sample of Large Banks.” Review of Finance, 17 (2013), 1947–1988.Google Scholar
Supplementary material: File

Hagendorff et al. supplementary material

Internet Appendix

Download Hagendorff et al. supplementary material(File)
File 181.1 KB